[Senate Hearing 106-543]
[From the U.S. Government Publishing Office]
S. Hrg. 106-543
THE PRESIDENT'S FISCAL YEAR 2001 BUDGET REQUEST FOR THE
SMALL BUSINESS ADMINISTRATION
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
FEBRUARY 24, 2000
Printed for the Committee on Small Business
______
U.S. GOVERNMENT PRINTING OFFICE
64-731 CC WASHINGTON : 2000
_______________________________________________________________________
For sale by the Superintendent of Documents, Congressional Office
U.S. Government Printing Office, Washington, DC 20402
COMMITTEE ON SMALL BUSINESS
ONE HUNDRED SIXTH CONGRESS
----------
CHRISTOPHER S. BOND, Missouri, Chairman
CONRAD BURNS, Montana JOHN F. KERRY, Massachusetts
PAUL COVERDELL, Georgia CARL LEVIN, Michigan
ROBERT F. BENNETT, Utah TOM HARKIN, Iowa
OLYMPIA J. SNOWE, Maine JOSEPH I. LIEBERMAN, Connecticut
MICHAEL ENZI, Wyoming PAUL D. WELLSTONE, Minnesota
PETER G. FITZGERALD, Illinois MAX CLELAND, Georgia
MIKE CRAPO, Idaho MARY LANDRIEU, Louisiana
GEORGE V. VOINOVICH, Ohio JOHN EDWARDS, North Carolina
SPENCER ABRAHAM, Michigan
Emilia DiSanto, Staff Director
Paul Cooksey, Chief Counsel
Patricia R. Forbes, Democratic Staff Director and Chief Counsel
(ii)
C O N T E N T S
----------
Opening Statements
Page
Bond, The Honorable Christopher S., Chairman, Committee on Small
Business, and a United States Senator from Missouri............ 1
Kerry, The Honorable John F., Ranking Member, Committee on Small
Business, and a United States Senator from Massachusetts....... 9
Wellstone, The Honorable Paul, a United States Senator from
Minnesota...................................................... 19
Witness Testimony
Alvarez, The Honorable Aida, Administrator, Small Business
Administration, Washington, D.C.; accompanied by Charles D.
Tansey, Associate Deputy Administrator for Capital Access,
Small Business Administration; Kris Marcy, Chief Operating
Officer, Small Business Administration; Russell Orban,
Assistant Chief Counsel for Advocacy, Small Business
Administration; and James Ballentine, Associate Deputy
Administrator for Government Contracting and Minority
Enterprise Development, Small Business Administration.......... 20
Alphabetical Listing and Appendix Material Submitted
Alvarez, The Honorable Aida
Testimony.................................................... 20
Prepared statement........................................... 28
Responses to post-hearing questions posed by Senator Bond.... 52
Responses to post-hearing questions posed by Senator Cochran. 89
Responses to post-hearing questions posed by Senator Kerry... 91
Bond, The Honorable Christopher S.
Opening statement............................................ 1
Letter from GAO to Chairman Bond dated February 24, 2000..... 5
Post-hearing questions posed to Ms. Alvarez and subsequent
responses.................................................. 52
Cochran, The Honorable Thad
Post-hearing questions posed to Ms. Alvarez and subsequent
responses.................................................. 89
Kerry, The Honorable John F.
Opening statement............................................ 9
Prepared statement and attachments........................... 13
Post-hearing questions posed to Ms. Alvarez and subsequent
responses.................................................. 91
Levin, The Honorable Carl
Opening statement............................................ 18
Wellstone, The Honorable Paul
Opening statement............................................ 19
comments for the record
Bond Market Association, Washington, D.C., statement and
attachment..................................................... 141
Rubin, Julia Sass, New Markets Venture Capital Consultant &
Doctoral Candidate, Harvard Business School, Cambridge,
Massachusetts, statement....................................... 146
(iii)
THE PRESIDENT'S FISCAL YEAR 2001
BUDGET REQUEST FOR THE SMALL
BUSINESS ADMINISTRATION
----------
THURSDAY, FEBRUARY 24, 2000
United States Senate,
Committee on Small Business,
Washington, D.C.
The Committee met, pursuant to notice, at 9:05 a.m., in
room SR-428A, Russell Senate Office Building, the Honorable
Christopher S. Bond (Chairman of the Committee) presiding.
Present: Senators Bond, Kerry, and Wellstone.
OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S. BOND,
CHAIRMAN, SENATE COMMITTEE ON SMALL BUSINESS, ANDA UNITED
STATES SENATOR FROM MISSOURI
Chairman Bond. Good morning. The Senate Committee on Small
Business will come to order. We are very pleased to welcome SBA
Administrator Aida Alvarez who will be testifying this morning
as we focus on ``The President's Fiscal Year 2001 Budget
Request for the Small Business Administration.''
I have been advised by minority staff that my good friend
and colleague, Senator Kerry, is probably caught in traffic
somewhere so we will give him the metropolitan excuse and go
ahead without him. We are delighted that Senator Wellstone has
joined us.
This hearing, for everyone's information, is being web
cast, which means that audio and video is being broadcast live
on the Internet. I join in welcoming all our viewers who have
logged on this morning. We appreciate your joining us through
the marvels of modern technology.
This is the beginning of my sixth year as Chairman of the
Committee on Small Business. During this time, small businesses
throughout the United States have demonstrated daily why they
are recognized as the backbone of our Nation's economy. Year in
and year out, thousands of new businesses are started, many
growing very rapidly, creating jobs, new investments, and hope
and dreams for families everywhere.
The energy exuded from a vibrant small business is
contagious. Once caught up in the entrepreneurial spirit, it is
very hard to let go. It is no wonder that delegations from all
over the world are studying the success of small business in
the United States. I find as I travel around the world they
want to know what the secret is for having a strong SME--or a
small- and medium-size enterprise part of the economy. I tell
them, for the most part it is getting Government out of the
way. But there are certain areas in which Government can be a
very positive force.
As we focus our attention on the Small Business
Administration and its budget for FY 2001, it is helpful to
reflect on the successes of the Agency. The foundation of the
Agency rests on its credit and management assistance programs.
During the past decade, we have experienced enormous growth in
the 7(a), the 504, the Microloan and the SBIC programs. Tens of
billions of SBA-guaranteed dollars have been loaned or invested
in small businesses. The SBDC and SCORE programs have allowed
the SBA to deliver management assistance and counseling to
millions of small business owners and budding entrepreneurs.
The Administration's budget request has proposed ambitious
plans for various new initiatives. I am pleased the President's
plan counts the HUBZone program as part of the New Markets
Program. As many of you know, the HUBZone program was created
and approved by this Committee and the Congress and signed into
law by the President in 1997. The SBA did not begin
implementation of the HUBZone program until March 1999 and is
now requesting $5 million to expand its staff and outreach
efforts to promote the program.
I urge the SBA to take advantage of its excellent resource
partners to increase opportunities for potential HUBZone small
businesses. For example, there must be at least 1,000 centers
and sub-centers in the SBDC program, and I would like to see
the SBDCs more active in distributing information about the
program. I would hope that the SBA HUBZone office could provide
each SBDC location with information about the HUBZone program
that would be provided to small businesses that are seeking
help.
Senator Kerry and Senator Wellstone each have a bill
pending before the Committee addressing the community
development venture capital proposals. In addition, SBA
officials recently provided the Committee staff with a briefing
promoting this initiative.
The SBA attempted to explain why the current SBIC program
was not reaching all those companies that needed venture
capital and singled out San Jose, California, as a community in
need of help from the New Market Venture Capital program. The
SBA stated that investments made by SBICs in San Jose had not
helped the local economy but were really focused on promoting
the growth of ``dot.com'' businesses in the high tech Silicon
Valley. Let me take a moment to review the San Jose situation.
Over the past 3 years, SBICs made 98 investments totaling
$67 million in 37 small businesses within the San Jose city
limits. SBIC investments are creating jobs and generating more
spending in San Jose. But somehow, the SBA has determined that
these SBIC investments and these new jobs are not helping the
local economy. This is counterintuitive. If we could get the
same kind of investment in my home town of Mexico, Missouri, we
would be extremely happy to have the kinds of problems that San
Jose is facing. I assure you, we could deal with them.
The SBA's fiscal year 2001 budget request also sets forth
very ambitious plans to (1) expand its core programs and (2)
transform the Agency to meet the challenges of the 21st
century. The SBA must surpass many hurdles to make this
transition a success. At the same time that the SBA is
attempting this reinvention, it wants to roll out new programs
that require increases in both staffing and budget.
Based on what has been presented to the Committee to date,
I have serious reservations about encouraging the Agency's plan
to expand its core programs, while transforming itself to meet
the challenge of the 21st century, while at the same time
introducing new initiatives.
As we discuss the future of the SBA, I cannot ignore the
impact this proliferation of new programs could have on the
core programs of the SBA. Congress has approved substantial
budget increases for the Agency in recent years. However, I
have received reports from the SBA that offices supporting key
technological SBA programs are underfunded or understaffed. As
the SBA shifts its responsibilities to meet the demands of the
2lst century, I am concerned that the human capital tools may
not be available.
In other words, I have no doubt that the SBA has a vision
for its future. What I am concerned about is that the Agency
lacks a formal written strategy to achieve its vision while
ensuring that its core missions are operating efficiently,
effectively, and economically.
Let me dissect this concern for a moment beginning with the
SBA's core missions and the programs it wishes to expand. Such
expansion does not happen without growing pains and change,
which can be difficult on a large organization. In addition, we
have to be honest, the SBA core programs are not operating
flawlessly. As you are aware, during the past year the
Committee received reports critical of the SBA's performance in
a number of core mission areas.
No. 1, GAO issued a report critical of the SBIR program.
No. 2, the Inspector General prepared an audit critical of the
7(a) program. No. 3, the Farm Credit Administration report on
the SBLC program was critical of SBA's management of the
program. No. 4, while the SBA's auditor gave the Agency an
unqualified opinion for its fiscal year 1998 financial
statements, the auditor cited three material weaknesses, which
call into question the SBA's internal controls designed to
reduce the risks in its operations.
Welcome, Senator Kerry. I already explained to them that
you had problems in traffic. Does that work?
Senator Kerry. Well, it is as good as anything.
[Laughter.]
Chairman Bond. All right, that will work. Close enough for
Government work.
Three years ago, many of us were enthusiastic about the
prospects for an SBA computer system that could monitor its
loan programs and the lenders that participate in the program.
We wanted to assist the SBA in meeting the challenges of the
21st century. As the Agency turned over many loan activities to
its lending partners, it would finally have the resources to
oversee the lenders.
In the past 3 years, Congress has appropriated $24 million
for the so-called Loan Monitoring System. Development of this
computer system is critical for the future operations and
success of the Agency. However, planning for the first
iteration has not been completed.
Just yesterday, I have received a letter from the General
Accounting Office about the status of ongoing planning for the
Loan Monitoring System. GAO confirms the SBA's failure to meet
its own deadlines. After 3 years, the initial planning phase is
not yet complete despite the fact that the SBA has advised the
Committee that it is anxious to implement the system.
The GAO letter is a good status report of the Loan
Monitoring System development, and I encourage my colleagues on
the Committee to review it. If there is no objection, I will
include the GAO letter in the hearing record. I trust that you
all have received a copy of this letter.
[The letter follows:]
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Chairman Bond. The changes confronting the SBA today are
enormous just to expand core programs and meet the challenges
of the 21st century through, among other things, a new Loan
Monitoring System. With these two challenges in hand, I hope we
will hear from you, Madam Administrator, about how the Agency
intends to address its ``Human Capital'' issue related to these
two challenges at the same time it proposes rolling out a
plethora of new programs.
I recognize and commend your commitment to small business,
Administrator Alvarez, but I do remain concerned with the SBA's
ability to expand its core programs which are not operating
optimally now, to transform itself to meet the challenges of
the 21st century, and to initiate a series of new programs all
at the same time.
I learned a long time ago that it is not very wise to build
a house on wet cement. You have to let the cement dry and set
before you build on it. That is what I am concerned that may
not happen here. Let us make sure that our core programs are
operating really well. I do not want to see anymore critical
audits or reports or evaluations. Let's get the Loan Monitoring
System off the ground. Then we can turn our attention to new
programs.
Before calling on the Administrator for her testimony, I
welcome the Committee's Ranking Member, my good friend from
Massachusetts, Senator Kerry, to make his opening comments.
Senator.
OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, RANKING
MEMBER, SENATE COMMITTEE ON SMALL BUSINESS, AND A UNITED STATES
SENATOR FROM MASSACHUSETTS
Senator Kerry. Mr. Chairman, thank you. Thank you very
much. I do apologize for being late. Senator Levin is not here
nor Senator Lieberman. We were down at the State Department at
a meeting, and I appreciate your indulgence. And there was some
traffic between here and there.
[Laughter.]
Senator Kerry. Administrator Alvarez, thank you for joining
us today. We are delighted to welcome you back here to the
Committee. In my judgment, you have sent the Congress a good
budget. I think the growing demand for the SBA's programs is a
reflection of the effectiveness in the way in which those
programs are being administered. And also a reflection of the
prosperity in the country--the roll that we are on, and the
increased opportunity that has been created.
I think your budget is realistic, and I think it is
appropriate, not just with respect to the existing programs,
but the new programs. I think we may obviously have some
differences here, and I hope we can work through them because I
do not think it is that provocative, or that challenging, to be
honest with you.
I think it is a smart budget. First of all, it eliminates
the controversial funding mechanisms for the disaster loan
program and the Small Business Development Centers that have
been a bone of contention in the past between appropriators in
Democratic and Republican Administrations. I think this
important change will set the tone for more a favorable
appropriations process and allow the Agency to focus on the
mission of helping small business owners who cannot access
traditional capital or training programs.
Perhaps it comes as no surprise that I do support the new
markets component of the budget, and I want to just say a few
words about that. There is $52 million in here for the New
Markets Venture Capital Program, and I think if you examine
what has been happening in certain parts of the country--
Massachusetts happens to be one of them--you would see the
power of venture capital. This is not a special kick for us in
any sense, because we have done very well. We are one of the
financial centers of the country. We have more private capital
managed in Boston than any other place in the world, and it is
reflected in the venture capital efforts that are taking place
there now. Likewise, California, Texas, Florida. Different
States have fared better than others. And many States--Senator
Wellstone's State--and other States are all increasingly
witnessing the power of this technology revolution, of
globalization, and of venture capital and the impact that it is
having on small businesses.
We know that when you have a strategically-targeted effort
combined with appropriate management assistance, we really have
the potential to organize and improve the economic
infrastructure of our poorest communities. It has to be a
matter of conscience. I cannot believe it is not, to Republican
and Democrat alike, that at this time of remarkable growth in
the Nation. There are pockets that just do not share in our
strong economy at the proper rate or sometimes at all.
Now, if ever there was a moment for this country to use the
power of capitalism effectively, in an enlightened way, to
reach into some of these communities, it is now. If you cannot
do it now, how are you going to do it if we are in a downturn,
the budget is being squeezed, and we are reducing or having to
cut and we do not have the surplus? Countless business
scholars--I would ask a little indulgence on the light, if I
can.
Chairman Bond. I went over by 30 or 40 seconds, so you can
go as long as you want.
Senator Kerry. I do appreciate that.
Senator Wellstone. Senator Kerry, don't you believe him for
a moment.
Senator Kerry. You did not hear what he said; I can have as
long as I want.
Senator Wellstone. I cannot wait for my time.
[Laughter.]
Senator Kerry. Let me just share with you very quickly, Mr.
Chairman. Two of our respected business scholars, William
Bygrave and Jeffrey Timmons at the Harvard Business School and
Babson College said that venture capital is really responsible
for having driven the success of the country over the last 20,
30 years. All of us understand that the reason we are holding
inflation down and the reason we are growing at the rate we are
growing, is principally because of the productivity increases
that are coming by virtue of technology.
Second, Michael Porter at the Harvard Business School has
written extensively on competitiveness, and he said that ``. .
. inner cities are the largest underserved market in America,
with many tens of billions of dollars of unmet consumer and
business demand.''
Third--final point--rural areas in this country are grossly
under-invested. In 1998, of the $59 million in true low- and
moderate-
income investments made by SBICs--meaning those investments
less than $1 million made in low- and moderate-income areas--
less than $1.1 million out of that total went to rural areas.
So, under the Community Development and Venture Capital Act
legislation that I introduced last September, many rural areas
would qualify as low- and moderate-income communities eligible
for Community Development Venture Capital investments.
I would submit for the record, Mr. Chairman, maps of
Montana and Georgia that speak volumes about the need for
investment in those rural areas.
Chairman Bond. Without objection, they will be included.
Senator Kerry. Thank you, Mr. Chairman. We have seen that
the existing venture capital program of the Small Business
Administration, the Small Business Investment Company program,
has really proven to be one of the most successful private-
public partnerships that we have in the country. Over the life
of the program SBICs have generated $26.6 billion in 12,000
financings of high-growth small businesses. And over the past 5
years, since the participating securities program was
initiated, $131 million in profit has been returned to the
Treasury of the United States.
It simply makes sense to continue that, expand that program
to reach these other communities. These results really need to
be spread throughout the country, and I hope that when we
reauthorize on March 21, we can put this venture capital
program to use around the country.
Now, let me just say very quickly, I am glad to see that
the funding request for e-commerce initiatives has also
increased, Madam Administrator, to $5 million. I think it is a
modest investment compared to the value of the e-commerce
market. It is estimated that every single day 90 million people
now are using the Internet around the world. And it is
increasing every day. For the past 5 or 10 years there has been
just a stunning shift that all of us are still trying to catch
up to in this kind of business.
Wearing my Commerce Committee hat, I have been meeting with
a lot of the CEOs across the country. Yesterday, for instance,
with Mike Armstrong at AT&T, one of our most established
companies, they are scrambling to keep up with and get ahead of
this new curve. And the impact for small business in terms of
B2B, business-to-business opportunities, is where most people
say most of the gain is going to come. It is just
extraordinary.
So I think we need to stay ahead of that curve. I am also
pleased about your $1.5 million for the Office of Advocacy.
Last year Senator Bond and I wrote a letter to the
appropriators requesting $2.5 million, and there was unanimous
consent at the roundtable on advocacy last year that the office
needs an increase. So I am glad we are doing that.
There are other efforts I would laud here, but rather than
chew up our time, I would ask unanimous consent to have the
full text pleased in the record.
Chairman Bond. Without objection, it will be.
Senator Kerry. Thank you, Mr. Chairman. Let me just close
by saying, I want to emphasize that the SBA's loan and
investment programs are an extraordinary bargain. The taxpayers
leverage their money in a remarkably effective way to help
thousands of small businesses every year fuel the economy. In
the 7(a) program, taxpayers spend $1.24 for every $100 lent to
business owners, and we have seen extraordinary successes of
companies like Ben & Jerry's and Winnebago, as some examples of
the program's effectiveness.
In the SBIC participating securities program, we spend
$1.31 for every $100 leveraged for investment. Again, companies
like Staples, Callaway Golf, Federal Express, Apple Computers.
These are all stellar examples of this kind of investment.
With the 504 program, we do not spend a penny to lend or to
leverage. The program is funded through fees. So I think we
have done a great job of pulling a bipartisan consensus here
together. My hope is we will be able to do that again with
community development capital. I hope, Mr. Chairman, that we
can get all of the subjects contained in this one hearing. It
is a little unusual to try to do this all at one hearing. I am
willing to try to do it. But I would hope that if we have some
subjects that somehow are not adequately explained, we reserve
the right to revisit it before we mark up so that issues will
get a proper hearing if there is some sense that there is
contention about them, or we do not have the ability to move
forward. I thank the Chair.
[The prepared statement and attachments of Senator Kerry
follow:]
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Chairman Bond. Thank you.
Senator Kerry. Now one just quick thing. Senator Levin
specifically asked me if I would read his statement--just 1
page.
OPENING STATEMENT OF SENATOR CARL LEVIN, A UNITED STATES
SENATOR FROM MICHIGAN, AS READ BY SENATOR JOHN KERRY
Senator Kerry. He says, ``Mr. Chairman, I apologize that
conflicting hearings make it impossible for me to participate
in this morning's hearing. A program of particular interest to
me is the SBIR program. I hope we can reauthorize that
important research and innovation program as soon as possible.
As part of that reauthorization, I appreciate the
Chairman's working with me to draft legislation to create an
outreach program to increase participation in the SBIR program
that will be available to all States. I hope to incorporate my
volunteer mentoring idea into this outreach proposal. Mentoring
provides an excellent complement to outreach. Through outreach
we would let more small, high-technology companies know about
the SBIR program, and through mentoring we would help them
improve their odds of achieving success.
The SBA also has a proposal to improve the SBIR program
that I hope we can work on together.''
Chairman Bond. Thank you very much, Senator Kerry. We
appreciate Senator Levin being with us by statement.
Senator Kerry. Finally, I ask unanimous consent that a
statement by Julia Sass Rubin on New Market Venture Capital be
placed in the record.
Chairman Bond. Without objection, I would be happy to do
so.
[The statement of Ms. Rubin is in the Comments for the
Record.]
Chairman Bond. I might just add, on the many subjects that
we have before us today, we noticed the conflict in hearings
and the difficulty in making sure that we have a full
membership of the Committee together. That is why last year we
began the roundtable process. The roundtables have gone into
great detail in going through the various specific areas of SBA
activity.
I have found, and the staff has found, these to be
extremely helpful. Senator Kerry and I have attended parts of
them. A number of our colleagues, I am afraid, have not fully
appreciated the importance of this. I am going to join with
Senator Kerry and urge all of our colleagues to make sure that
staff is present for the roundtable meetings. We know the
pressures of the Senate schedule, and we all serve on at least
two A committees that have hearings at the same time so we
cannot be here. But I would hope that staff for all Committee
Members would make it a point to attend the roundtable
meetings.
For the effective functioning of the Committee, it is
important that we at least have staff participation, because in
a Roundtable there is a lot more information than we can cover
than in a hearing. But as you will note today, there are three
Members for what we had hoped would be one big markup with as
many Members attending as possible. So I share your concern,
but we need to make sure we have all the Committee Members
involved.
With that, let me turn--for his lengthy opening statement--
to my colleague from Minnesota, Senator Wellstone, who has up
to a whole 5 minutes, if you want it.
OPENING STATEMENT OF THE HONORABLE PAUL WELLSTONE, A UNITED
STATES SENATOR FROM MINNESOTA
Senator Wellstone. Mr. Chairman, I promise to keep my
remarks under an hour.
[Laughter.]
Chairman Bond. Senator Wellstone, I would say you have been
one of the most faithful Members in attending all the hearings
and we do appreciate your participation. You have been a very
important contributing Member of the Committee.
Senator Wellstone. I appreciate your gracious remarks.
Let me welcome Administrator Alvarez. Let me say that I
think it is a good budget. I am glad that you maintain and
build the funding for some core programs. The 7(a) and 504
programs have been tremendously successful in our State of
Minnesota. Ed Dahm runs a great operation. We have a terrific
working relationship between the small business community and
the SBA office and I want you to know that.
The other thing you do is you find some room for some
creative solutions to deal with communities, as Senator Kerry
said, that have been left behind. In some ways it has been an
uneven recovery and it is painful to see the economy booming
while at the same time there are literally communities that do
not share in this prosperity, and I appreciate that focus.
Let me in particular focus on one program, and that is the
request for funding for the New Markets Program. As you know,
Mr. Chairman, 2 years ago as a part of the Small Business
Programs Restructuring and Reform Act of 1998, I had a proposal
that was in there, and the Committee supported it, which was
called the Community Development Venture Capital Demonstration
Program. That program was passed by this Committee, later on by
the full Senate, but we did not get it done in the House.
I reintroduced that legislation last year because I think
my proposal and the New Markets Venture Capital initiative
complement each other. In fact, Senator Kerry has been good
enough to include my legislation as a part of his overall
initiative, and I am very pleased with that.
I think what I need to do today is to say that I hope we
can work together. I heard the Chairman's remarks, have respect
for what he said. I want to put myself on record that I
certainly will have an amendment here in Committee to add this
Community Development Venture Capital Act to the SBA
Reauthorization bill. Or if Senator Kerry introduces his bill
as an amendment, then that would be the effort, and I would
prefer to join really with my colleague from Massachusetts. But
I think, Mr. Chairman, that as Senator Kerry said, we ought to
be able to work this out. I really do not think the differences
are that great.
To just highlight one of those, I agree with what you said
about these roundtable discussions. On May 18 of last year we
had a roundtable discussion on SBA equity programs, and we had
a great 45-minute discussion and there were, I think, some
perceptive comments made from folks like Don Christenson at
SBA, Julia Sass Rubins at Harvard University, in support of
these proposals that I am talking about.
Plus we had folks that are out there doing this kind of
work right now, Nick Smith with Northeast Ventures in
Minnesota, Ray Moncrief of Kentucky Highlands, and Elyse Cherry
in Boston. They were very supportive of this initiative. I also
would recommend that our colleagues be sure to read, at least
get their staffs to read the record and look at that discussion
because it was, I think, very important.
Finally, I would commend you, Administrator Alvarez, for
the increased funding for the Microloan program, and also the
technical assistance. I think that the doubling of funding in
both areas is justified because what we find out in Minnesota,
it is a heart and soul program. Some of these Microloan
businesses are just fabulous. I mean, so inspiring. But the one
thing that happens quite often is without the technical
assistance they do not succeed. I think the two go hand in
hand, and I think you are right on target.
I want to note one request in this budget that has not been
mentioned, Mr. Chairman, and that is the request for $3 million
out of the proposed $85 million small business development
center to establish a Native American small business
development center network. This network would focus on
providing the assistance to Indian reservations, the training,
the counseling, the technical assistance.
I think we really need to get out there in Indian country.
I come from a State with a significant presence of Native
Americans and I think that proposal is right on target. I am
also a member of the Select Committee on Indian Affairs and I
just want to indicate to you my strong support.
I think I stayed under 5 minutes, Mr. Chairman.
Chairman Bond. Thank you very much, Senator Wellstone. Now
we turn to Administrator Alvarez. Welcome.
THE HONORABLE AIDA ALVAREZ, ADMINISTRATOR, SMALL BUSINESS
ADMINISTRATION, WASHINGTON, D.C.; ACCOMPANIED BY CHARLES D.
TANSEY, ASSOCIATE DEPUTY ADMINISTRATOR FOR CAPITAL ACCESS; KRIS
MARCY, CHIEF OPERATING OFFICER, SMALL BUSINESS ADMINISTRATION;
RUSSELL ORBAN, ASSISTANT CHIEF COUNSEL FOR ADVOCACY; AND JAMES
BALLENTINE, ASSOCIATE DEPUTY ADMINISTRATOR FOR GOVERNMENT
CONTRACTING AND MINORITY ENTERPRISE DEVELOPMENT, SMALL BUSINESS
ADMINISTRATION
Ms. Alvarez. Thank you very much. Good morning, Mr.
Chairman, Senator Kerry, Senator Wellstone.
I appreciate the opportunity to testify here today on
behalf of the SBA's fiscal year 2001 budget. Before I begin, I
want to say, Senator Bond, that I do believe many of the
concerns you raise are actually addressed in my testimony, and
obviously, I would be happy to discuss them. I do have one
concern that is not addressed in my testimony and that is the
GAO letter that you mentioned. You said you received it
yesterday. I have not seen this letter. I understand that GAO
sent a draft, unsigned letter to the SBA which, as I said, I
haven't seen and I request that the Committee hold the record
open for the SBA to fully respond to the letter. I would like
our letter to also be a part of the record of the hearing.
[The letter appears in Exhibit 2 of the appendix.]
Chairman Bond. Without objection, that will be. We asked
them for a quick status report and they had advised us they had
received a response from your Agency just as a partial update
on it.
Ms. Alvarez. I would appreciate that.
Chairman Bond. They apparently have had some discussion
with officials in there but obviously you are welcome to submit
a more extensive statement since this is an ongoing program,
so, we will be happy to have further comments on it.
Ms. Alvarez. Thank you very much.
And also with regard to our modernization effort, I will in
my testimony address the progress we have made, which has been
significant. We did have a meeting yesterday. My Deputy met
with senior GAO auditors and, frankly, I am surprised to hear
your statement because we have made enormous progress working
with them every step of the way as well as with the IG. And, at
the meeting yesterday, they underscored the progress we were
making. So, again, it is something that we can revisit, and I
do discuss it in my testimony.
Senator Kerry and Senator Wellstone, you have made a very
compelling case for the New Markets Initiative, which is
actually a bipartisan effort. I know that you mentioned the
HUBZone program is a part of the New Markets Initiative because
the thinking, the objectives of the HUBZones program is totally
consistent with what we are trying to accomplish with new
markets. And I know that Speaker Hastert has been working with
the President on behalf of a New Markets Initiative.
Senator Kerry has introduced a bill which I believe does
include Senator Wellstone's proposal, and I am pleased to say
that I was just informed yesterday that on the House side
Congresswoman Valazquez, working with Jim Talent and Peter King
and a number of other members from both sides of the aisle are
prepared to present shortly their version of the New Markets
Initiative.
So, I really hope that we can work together. I think there
is a recognition across the Congress that this is an opportune
moment to address unmet needs and we feel that it is the role
of the SBA, always has been, to address the gaps and not be
satisfied with our success to date but continue to indentify
new frontiers, new areas, like these new markets, where we can
make a difference.
With respect to our new budget, it has to be put, I think,
in context--and Senator Bond, you, and the other Senators as
well, addressed the fact that this is a booming economy and, in
fact, so much of this economic expansion is actually being
fueled by small businesses; 25 million in the United States,
which is 5 million more than in 1990 and the most ever in this
country. There has been tremendous growth, for example, among
Hispanic-owned businesses, African-American-owned and Asian-
American-owned businesses. The number of women-owned businesses
has doubled to nearly 9 million and they are now generating
over $3 trillion in revenues. The biggest job creators in this
country are small businesses.
To keep pace with that growth and also to help America's
disaster victims, I am requesting a budget for the fiscal year
2001 of a little more than a billion dollars. This budget would
fund record levels of loan and venture capital assistance. It
would expand management and technical assistance for America's
small businesses and it would also allow us to continue our
mission of assisting disaster victims. Last year we approved
36,000 loans a for a little more than $900 million, which
helped retain--our loans to businesses--helped to retain 35,000
jobs. And this year we are requesting full funding for our
disaster program, which is $296 million, up from $276 million.
As I mentioned, our budget request would fund record levels
of lending and venture capital. Let me just address our needs
in the area of our loan programs. In fiscal year 1999, the SBA
guaranteed 50,000 loans and approximately one-third of those
loans, 7(a) loans, went to startup firms less than 24 months
old. That is very important to help the most vulnerable and the
most promising of small businesses. We have, since 1992, more
than doubled our lending to minority-owned businesses, while
tripling our lending to women-owned businesses. We are
addressing a very important need in the area of equity capital
and in 1999 our Small Business Investment Companies accounted
for over half of all the institutional-venture capital
transactions in the United States; an estimated $4.2 billion.
And I think that is a remarkable success for that program.
For our core programs we are requesting $274 million to
deliver more than $20 billion of credit, venture capital, and
technical assistance, up from $17 billion this past year. It
includes an $11.5 billion program level for the 7(a) program,
up from $9.8; $3.75 billion in 504, with a reduced guarantee
fee for the fourth year in a row; $60 million, a doubling for
the microloan program; $45 million for microloan technical
assistance; and we propose a $2.5 billion program level for the
SBICs. We expect this investment to attract an additional $1.25
billion in private capital. With 3.75 billion in new SBA-
leveraged funding, plus their on-hand private capital, we are
looking to hopefully see $4.5 billion in investments in fiscal
year 2001.
And, as you mentioned, Senator Kerry, the SBIC
participating security program is producing returns; $131
million to the Treasury as a taxpayer's share of their profits.
I think to really appreciate the success of the SBA in
assisting small businesses, we need to take a step back and
look at the big picture. Since 1992, the SBA has backed more
than $71 billion in small business loans and venture capital,
which is more than in the previous 25 years combined. This is
an amazing success story and it is no wonder that
representatives from countries around the world are flocking to
the SBA asking us, ``How do you do it?'' This is clearly
because small business is the engine of the economy and the
role that the SBA plays is critical as a catalyst and a
facilitator of this success.
In the area of procurement, small businesses achieved a
22.4 percent share of the procurement goal and obviously, Mr.
Chairman, we have talked about this, our goal is 23 percent and
we are working to make sure that that is what happens. Last
year we were pleased to launch the historically under-utilized
business zone program, HUBZone program. I am proud to say that
nearly 900 businesses are now certified as HUBZone firms. We
are requesting $5 million, up from $2 million, to continue to
develop HUBZone contracting.
SBA's Office of Advocacy has done a fine job, especially in
showing Federal agencies how to achieve their policy objectives
without placing an undue burden on small businesses. Their
research and database is a national resource and we are
requesting an increase of $400,000 to $1.5 million.
In his State of the Union address, President Clinton
repeated his belief, which we have heard repeated here today,
that more must be done to extend the benefits of today's
economy to our inner cities, our poor, rural areas and Native
American reservations. As I said, I am pleased to see the
bipartisan support. When I met with Congressman Hal Rogers the
other day he said to me, ``You know, this New Markets Venture
Capital program will help my district.'' He recognizes the role
that this venture capital program will have in rural
communities. And, so, I think there is a lot of enthusiasm for
the possibilities here.
I want to talk a little bit about what it is going to take
to fund this program and why it is worth the investment. To
establish the New Markets Venture Capital companies we request
$21.6 million, which would support a program level of $150
million. We are also requesting $30 million for the technical
assistance component, again, it is the small-sized equity
investments plus the technical assistance that are the key to
the long-term success of the new markets businesses. We arrived
at the cost of this program by using the most conservative
assumptions possible. We believe having studied other of our
programs, which started out with a higher cost, that it is just
a matter of time before the cost of that program will go down.
We want to make sure that we are very safe in how we approach
the program. I do think that the long-term benefits are
impressive.
You mentioned the success that we have had in San Jose with
our Small Business Investment Company program. We are very
proud of the fact that investments are being made in San Jose.
Some of those investments came about because we developed low-
and moderate-income debentures, which we saw as another way to
give incentives to those venture companies to make these
investments. The fact of the matter is that our SBICs are for
the most part profit-oriented, as is appropriate. But when we
are talking about New Market Venture Capital companies, we are
talking about companies that will not so much be profit-
oriented as mission-driven. The kinds of investments that New
Market Venture Capital companies will make are really going to
be quite different from those that our SBICs are making,
whether it is in San Jose or elsewhere.
Here is what the picture looks like right now for these
smaller type of investments that we are proposing in the New
Markets program. Right now there are virtually no institutional
sources of equity-type capital in these distressed communities.
We are talking about distressed communities. San Jose has
distressed neighborhoods, but, for the most part, I wouldn't
characterize it all as distressed. Nationwide the community
development venture capital industry consists of essentially 25
firms with about $157 million under management. Out of these 25
firms only 14 of these funds are capitalized at $5 million or
more, which we believe is the absolute minimum for economic
viability. Our own analysis of these community development
venture capital companies indicates that one direct job is
created for each $10,000-$15,000 equity investment. On this
basis, $51.7 million should generate between 13,300 and 20,000
direct jobs at a cost of between $2,600 and $4,000 each. If the
indirect jobs are included, the cost is even less.
We believe that this investment in new markets will
ultimately pay off in a big way. These investments will not
only create capital for those businesses but will generate
employment in places that are suffering now from a lack of
jobs, very consistent with the objectives of the HUBZone
program.
The SBA is requesting funding for other New Markets
Initiatives as well; the PRIME program, which was passed last
year and signed by the President at the end of the session of
Congress. Again, this is a program focused on technical
assistance, $15 million to build the capacity of the micro-
enterprise industry, generally. We believe that this is a very
good complement to our new market strategy. Our new market
strategy is clearly focused on newer, smaller businesses,
first-time entrepreneurs located in communities that have been
overlooked. They need not only the money, they need the
technical assistance to make it.
Then $6.6 million for BusinessLINC. We have already had a
successful sort of kickoff of BusinessLINC which is a way in
which big businesses work hand-in-hand with small businesses.
Senator Kerry mentioned AT&T. There are many big companies that
can play a great role in working with small businesses.
Native American communities, Senator Wellstone mentioned
Native Americans. The figures for Native Americans are really
shocking. Many reservations, have between 40 and 60 percent
unemployment rates; 53 percent of Indian homes on reservations
do not have a telephone. These are the kinds of needs we are
trying to address with a budget that proposes $5.75 million for
Small Business Development Centers, for BusinessLINC and for
Tribal Business Information Centers.
You spoke extensively about the area of safety and
soundness and human resources management and modernization,
areas where we have spent considerable time and effort to
continue to make progress and keep pace with the needs. We feel
very confident that as our core programs have grown, which has
been in response to the overall growth of small businesses and
the economy, we have actually become more sophisticated than
ever in addressing safety and soundness and loan monitoring
concerns.
Let me just briefly outline the steps that we have been
taking to ensure that we can combine our interest in sustaining
this unprecedented growth by increased funding for our core
programs as well as identifying the new markets and penetrating
there.
In fiscal year 1999 we instituted a safety and soundness
examination for the Agency's Small Business Lending Companies
and examined all 14 companies. This had never happened before.
This was the first time. We are already on to the second round
of reviews, which we expect to complete in September. The
issues and deficiencies that were raised in the first round,
for the most part, have already been addressed by the
institutions.
We have also established, as you know because we advised
you when we were about to do this, the Office of Lender
Oversight, and we have a risk management committee, again, a
first at the SBA. We have completed our first full cycle of
reviews for participants in the Agency's Preferred Lender
Program and we expect to complete a second round of reviews by
April. Again, this is something that has not occurred before.
We also are requesting an increase in funding for the
Inspector General to $14.3 million. We have worked hand-in-hand
with them every step of the way on these initiatives and we
support their need for funding to continue to review, audit,
and provide oversight of SBA's programs and services.
Our core program for small business counseling and
technical assistance, the Small Business Development Centers,
helped more than a million entrepreneurs in fiscal year 1999
alone. I am very pleased to say that for fiscal year 2001 we
are proposing full funding of $88 million for the SBDCs, and as
Senator Wellstone said, $3 million to fund an SBDC network for
the Native American communities. We think this is a step in the
right direction, part of the New Markets Initiative.
For SCORE we propose $5 million, up from $3.5 million.
SCORE is doing a great job. They are doing on-line, interactive
counseling with small businesses. To meet the growing demand of
today's women entrepreneurs, SBA's Women Business Centers have
more than tripled in 3 years, growing from 18 funded centers to
59, including 25 new centers in fiscal year 1999, lots of
activity, lots of work with women. We request $12 million up
from $9 million this year, to expand the network to more than
80 sites. Our goal is to have at least one Center in each
State.
SBA requests $10 million to maintain our existing One-Stop
Capital Shops and to open new ones in Empowerment Zones.
Empowerment Zones, as you know, are located in HUBZones and
they also include our targeted new markets communities.
Veterans, we are very pleased that we are asking for $4
million to support initiatives to assist veterans in their
entrepreneurial
activities, particularly, service-disabled veterans. 7(j)
technical assistance, which is a program that really is
important to assist particularly minority-owned businesses to
enhance their business development and executive education, we
are asking for $5 million.
Senator Levin, in his letter, addressed the needs in the
area of technological small businesses through the Small
Business Innovation Research program, SBIR. We have been
helping these small businesses get to a point, Phase III we
call it, where they have fully developed their federally-funded
products but they lack the necessary capital to market and
commercialize the technology. Phase III funding would provide
grant dollars to assist them to make that transition into the
commercial market place. We request $15 million in grants for
fiscal year 2001 to fund the first year of a 3-year SBIR Phase
III pilot program which would commercialize the R&D effort of
small, high-tech businesses.
Mr. Chairman, our focus is on the success of our small
business customers, as it should be; however, I would like to
brag a little bit about the success of this small agency. SBA's
workforce and the way we deliver programs have changed
dramatically over the past decade. Since 1990, our loan
portfolio has grown from $17.5 billion to about $50 billion. At
the same time the number of our employees has decreased 22
percent, from 4,000 in fiscal year 1990 to about 3,100 now.
We have involved the private sector where it made sense,
contracting out or delegating activities that could be
performed more effectively elsewhere. This transition has
allowed us to downsize as well as to use staff strategically
for marketing, more complicated financial transactions, and
loan monitoring, for example, and it has involved training and
retraining, which is part of our human resources management. We
do have written plans that address the training and retraining
needs and, in fact, we have a record of some of the types of
training that our senior managers, middle-level managers,
people in the field have already received in order to make this
transition. We would be happy to share that with you.
All of this has been accomplished while keeping our fiscal
house in order. We are proud to report a clean opinion in
fiscal year 1998 in our financial audit report, which is the
highest rating a Federal entity can receive. This was the third
year in a row the SBA attained this rating, and we also expect
to obtain a clean opinion when our 1999 report is issued on
time next week.
We have laid out an aggressive agenda to improve our
internal management and infrastructure. You mentioned $24
million. And $13 million for systems modernization and lender
oversight, risk management activities; $7 million for
information technology infrastructure support; $4 million to
train and transition our workforce. We have spent 2\1/2\ years
developing plans as required by law which require that we have
very detailed plans that outline step-by-step what we will do
before we acquire any systems, which is the reason why we
haven't done some of this yet. But we have completed those
plans working with GAO and with various committees. I am happy
to say that we have almost completed the first part of Phase I
of our modernization effort. That will be completed and
implemented this summer.
For the first time this summer the majority of loan
transactions will be processed electronically by the SBA. This
will represent 69 percent of our loans and 79 percent of our
loan dollars. Not only will this create enormous ease and
efficiency in a paperless transaction, it will also allow us
for the first time to collect data electronically that we have
never been able to collect before, which will help us with
lender oversight and loan monitoring.
Senator Kerry mentioned e-commerce, $5 million, and our
budget includes, I think, a modest amount to ensure not only
that we provide even more of our services electronically--we
have 6 million hits a week on our web site. We are doing
electronic counseling--we also want to ensure that small
businesses can participate in the opportunities created by e-
commerce.
We want to build on the success of the Y2K outreach
initiative which, thanks to your help and that of your
colleagues, allowed us to hold 1,300 workshops on Y2K which
were attended by 1.1 million small businesses. These are all
small businesses engaged in the topic of technology as it
affects their businesses. There is a need and an interest, we
want to build on that, we don't want to lose the momentum. The
e-commerce, the $5 million request, will help us continue that
effort.
So, in conclusion----
Chairman Bond. Madam Administrator, I was just going to say
we have been a little generous with the 10-minute light.
Unfortunately, Senator Kerry and I both have competing meetings
and hearings. The Murphy's Law, which said, if anything can go
wrong, it will go wrong, was a gross overstatement and
optimistic assessment of Senate schedules. We would be
delighted to have your full comments that you have submitted
for the record, and I would like to give Senator Kerry an
opportunity to ask any questions before he has to leave.
Ms. Alvarez. Absolutely.
[The prepared statement of Ms. Alvarez follows:]
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Senator Kerry. Mr. Chairman, thank you very much.
I really do apologize.
Ms. Alvarez. No, that is OK. I had hoped to answer a lot of
the questions that might be raised in the course of the
testimony. That is why I took a little longer.
Senator Kerry. I would like to ask permission to submit any
additional questions in writing.
Chairman Bond. I will be submitting some and, of course,
all Members of the Committee, and we will advise the staff, are
invited to submit any questions for the record. Questions will
have to be ready tomorrow. And then we would like to have your
responses in a week, if that is possible.
Ms. Alvarez. Sure.
Senator Kerry. Madam Administrator, can you share with us
quickly the 7(a) policy and program implications of
prepayments?
Ms. Alvarez. Well, I actually would like Charles Tansey to
address that because that is an area on which we have had many,
many discussions.
Senator Kerry. Sure.
Mr. Tansey. I am Charles Tansey. I am the associate deputy
administrator for Capital Access.
Chairman Bond. Welcome, Mr. Tansey.
Mr. Tansey. Thank you.
We have not included this in our legislative package but it
is a very serious issue that has been brought before us. The
issue became a major one, I think, in the last year or year-
and-a-half primarily having to do with long-term 7(a) loans of
15 years or more. There is quite a bit of prepayment activity
in the secondary market. Our sense is that from a mission
standpoint this may conflict to some degree with the idea of us
being a gap lender, but the flip side of it is that prepayments
are causing a tremendous amount of anxiety in the secondary
market and reducing, thereby, the attractiveness of that market
and the possibility of additional 7(a) activity and
availability of the 7(a) program for people who participate in
it.
So, I think right now what we are doing is we are reviewing
the issue, and we are neutral on it.
Chairman Bond. We would like the guidance that your Agency
can provide.
Ms. Alvarez. Good. We would be happy to do that.
Senator Kerry. Just quickly, on the New Markets Initiative.
You addressed that significantly, Madam Administrator, but I
just want to clarify. In your statement you mentioned that in
1999 the SBICs averaged less than $1 million per investment and
other venture capital firms averaged $6.2 million. But I just
wanted to point out that that average $1 million represents all
SBIC investments, debt and equity, without looking at a target
area.
Ms. Alvarez. That is right.
Senator Kerry. So, if you break it out in target area,
investments of $1 million or less in low- and moderate-income
areas, you actually wind up with, I think, only about $66
million out of the total $4.2 billion of SBIC investments last
year. Is that accurate? I mean, do you agree with that?
Ms. Alvarez. That is right.
It is still a modest amount and it is why we think that New
Markets Venture Capital fund will allow us to make smaller
equity investments in communities that just haven't been
reached.
Senator Kerry. Good. And I don't disagree with the
Chairman's notion that--I mean, it is good to get a sense of
how this gels with the other programs. I think we obviously
ought to have that sense as we try to approach it.
Finally, in terms of verbal questions right now, given that
the PRIME program is authorized for FY 2000, what are your
plans with respect to funding and beginning implementation this
fiscal year?
Ms. Alvarez. We have several funding concerns. One is for
the 7(a) loan program where we had requested enough funding for
$10.5 billion, and we did not receive that. And of course, it
appears, fortunately and unfortunately, that our projections of
$10.5 billion were on target. So we are looking to find ways to
make up the difference for 7(a) as well as for PRIME, and for
the veterans program for this year.
We have been talking on a daily basis about strategies for
doing that within our existing budget. We hope to have an
answer for you very shortly.
Senator Kerry. That would be great. Obviously, it is still
up in the air a little bit.
Ms. Alvarez. A little bit, but we have some options that we
are looking at.
Senator Kerry. Good. That would be helpful.
Thank you very much.
Ms. Alvarez. Thank you.
Senator Kerry. And thank you, Mr. Chairman, for your
courtesy, and we will submit a few questions for the record,
but not many.
Chairman Bond. Thank you very much, Senator Kerry. I had
discussed with Senator Kerry my interest in getting the GAO to
undertake a review of the economic stimulus programs that would
be related to, and either complementary to or overlap the New
Markets Program. I want to make sure that we take advantage of
this opportunity but not reinvent any wheels. We have enough
wheels running around here without reinventing new ones. I want
to get a sense from GAO as to where we stand.
Let me go back to the Loan Monitoring System. I think we
have a chart somewhere. I always have to have a chart.
[The chart follows:]
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Chairman Bond. As best we understand, this is from what we
have learned from the SBA and the GAO, the status of the
mandated actions. I gather the target completion dates were
back in August, and in some cases some of these steps are still
in draft form. Several of the final products came out a week
ago, and I think seven of them just came out last week; several
of them are still in draft.
What is your projection on when you are going to finish
your work on the mandated actions?
Ms. Alvarez. First of all, as I said, this is very complex
stuff.
Chairman Bond. We understand that. That is why we----
Ms. Alvarez. We talk about, for example, Phase I. I
mentioned before that by this summer we intend to do 79 percent
of our loan dollars, transactions will be handled
electronically, which is something we have never done before.
That is a significant breakthrough.
We are also working very closely with disaster to make sure
that these disaster loans are all done electronically, which
will actually result in some, I think, significant savings for
that program.
I would like to ask Kris Marcy, who is our Chief Operating
Officer, who has been working day and night on this project,
because it is very complex. It cuts across all these
departments as well as our outside partners. She has also, by
the way, been going to different offices in the field and
having meetings and training sessions with our folks around the
country.
Chairman Bond. We would be happy to welcome her. I might
say, the GAO has advised us that there is an excellent working
relationship and it seems that it has worked well together, but
there are many hurdles ahead. Ms. Marcy, we would welcome your
comments on this.
Ms. Marcy. It is nice to be here. We have worked very
closely with the General Accounting Office, and frankly, many
of the staff members in this room. We have done that both at
their request and, frankly, many times we have offered and
asked to come up to review our progress.
This is enormously complicated. It involves all our
programs. You have a chart here that is, I think, a very
accurate representation. We saw it yesterday for the first time
but we have no problem with the accuracy of this chart. You
will note that this is only for Phase I, and we are also
actively engaged in Phase II as we speak, which is critical for
our financial statements, our core accounting. It has many
relationships to Phase I and the loan accounting system, and it
includes the disaster program.
So we have got an awful lot of activity underway. We think
we have made enormous progress and we could not have done it
without the help of the staffs and the General Accounting
Office.
Up there you have eight planning steps that were
articulated in the Reauthorization Act of 1997. These are steps
to design a good quality system to avoid risk. Of the steps
that you have there, you have 17 work products in the middle
column. I believe 14 are shown as final, 3 are still in draft.
And to get to that 17 we have 28 separate contract
deliverables. It has been exhausting.
But a word about this collaborative process. The way this
works--because beauty is in the eye of the beholder--we will
not say that we are finished, final, 100 percent perfect by
ourselves. We do this in collaboration with the General
Accounting Office and also with your staff. And many, many
times when we submit a product as draft we are asked to make
adjustments or revisions, and we do that willingly. So you will
see these things go back and forth many times.
While we would love to have a chart that says everything is
final and it was done a year ago, that is just not the nature
of this program unfortunately. We do think, all said and done
though, that we are ready to begin iteration one, Phase I. We
think it is absolutely critical that we do that so that we get
the critical loan information that we need.
Chairman Bond. I think you have made the point that I am
trying to make in my initial presentation, that this is a
major, ongoing program. You have spent $24 million so far on
it. There was a request for an additional $13 million for 2001.
Ms. Marcy. We are much more conservative than that. We have
received appropriations of $24 million to date through 2000.
The way this works is that we get even one more level of
review; so before we can spend the appropriations we do need to
submit a spending plan to the appropriating committees. We have
received acknowledgement to spend $16 million of the $24
million. Of that, we spent $3.2 million of the 1998
appropriations and $3.6 million of the 1999 appropriations. So
we have spent about $7 million of the $24 million in
appropriations thus far.
Chairman Bond. So you still have $16 million that has been
appropriated and not approved? And you have asked for another
$13 million, or is this just a request to OK the remaining $16
million?
Ms. Marcy. This is not easy. We have about $9 million which
is sitting in an organization called FEDSIM at GSA that
basically allows us to put technology money aside, obligated to
them so that we can use it and draw it down as we need to. So
we have that in the bank, if you will.
For the 2001 budget, as the Administrator said in her
testimony, we have requested not $8 million as we have in the
prior 3 fiscal years, but $13 million. And of course, that will
be subject to lots of review.
Chairman Bond. Is that on top of the $24 million?
Ms. Marcy. Yes, Sir, it is.
Chairman Bond. So that brings it to $37 million. You are at
$8 million now and----
Ms. Marcy. We have spent about $7 million now. We have $24
million appropriated.
Chairman Bond. You are $7 million toward completion of a
$37 million project.
Ms. Marcy. Yes, Sir.
Ms. Alvarez. I think you can appreciate, Senator, that the
budget process works on a year-to-year basis. But when you do a
complete overhaul of a system you have to think in multiple
years.
Chairman Bond. That is my point.
Ms. Alvarez. And there are times when, particularly as you
are working out a detailed plan you need to keep the money in
reserve, because when you spend it, you are going to spend
substantial amounts of money and you will not have time at that
point to start a process of soliciting funds if you want to
move quickly. So that is why some of this money is in the
FEDSIM account.
Chairman Bond. I do not challenge that. That is what I
understand. I just want to lay out the picture and make sure
that I understand, and my colleagues understand, how much work
there is yet to be done on this program. That is the point. I
appreciate that, and we would probably have a follow-up
question or two on those things just so we can see where it
stands.
Ms. Alvarez. Absolutely.
Chairman Bond. We will look forward to having your comments
on this. We are very interested, and I have some people on my
staff who even understand what is going on, and they too will
be communicating with you on it.
Ms. Marcy. We are well aware of that. Thank you.
Chairman Bond. Thank you very much. Let me jump over to the
Office of Advocacy which is of great concern to all Members of
this Committee and certainly to our friends in the small
business community. The 2001 budget request includes 47 FTEs.
How many staff does the Office of Advocacy have on board at
this time?
Ms. Alvarez. Is Jere Glover or Kay here?
Chairman Bond. I hope Jere is out working.
Ms. Alvarez. Russ, do you know the answer to this question?
Sit down, Russ, and introduce yourself.
Chairman Bond. Please identify yourself for the record.
Mr. Orban. I am Russ Orban from the Office of Advocacy.
Jere Glover is working this morning and I am sorry about that--
real sorry he is not here.
[Laughter.]
Chairman Bond. How many FTEs do you have on board now?
Mr. Orban. I believe we have 47 on board.
Chairman Bond. Madam Administrator, since 1993 the Office
of Advocacy staffing appears to us to have dropped dramatically
even though the duties of the office were expanded under the
Red Tape Reduction Act and the Regulatory Flexibility Act,
SBREFA as it is known. Why has that gone down, and is 47 enough
to cover the increased requests that are being placed upon this
office?
Ms. Alvarez. You can imagine I have had a number of
conversations with Jere Glover about this topic and what I have
said to Jere is, everybody is taking a hit.
Chairman Bond. How much of a hit did they take? From 1993,
what was their level in the past?
Ms. Alvarez. I am looking here, in 1996 it says here the
staff--Russ, do you want to articulate this?
Chairman Bond. Where were we in 1993, and what has the
trend been since 1993?
Mr. Orban. In 1993 we had, I believe, 62 FTEs and that has
gone down now to an authorized level of 50, and I think there
are 47 that are currently on board.
[Mr. Orban subsequently submitted the following:]
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Alvarez. This year, Mr. Chairman, we are looking to reduce
our staffing overall at the SBA by 146 positions.
Chairman Bond. What percent is that of your total
employment? How many employees----
Ms. Alvarez. It is about a 5 percent reduction from last
year. We recognize that in order to implement some of the newer
programs and to support HUBZones and other programs we are
going to have to increase by about 86 in fiscal year 2001,
which will still give us a net reduction in employees from last
year. So it is part of this process of managing our human
resources and evolving.
With respect to the Office of Advocacy, we have a process
where we are managing every single office in terms of their
requests, and we need to evaluate the relative sensitivity of
the functions being performed. We would love to give Jere more
people. We would also love to give Charles Tansey more people.
And I can go across the board with all of our managers and I
could make a compelling case, as they could, for why these are
very important functions.
Chairman Bond. As I said, this is something that I think
the Committee on a bipartisan basis supports very strongly. We
expect them to carry a much heavier workload, now that we do
have under SBREFA the means to enforce the Regulatory
Flexibility Act, which we did not have. And if my rough
mathematical calculations are close, it is a 20 percent cut,
come down from 62 to 50, and we are just concerned, will 47
people be able to do the job?
Ms. Alvarez. I have encouraged Jere, as I have others, to
the extent that the work can be done using outside consultants
and specialists, which would be a one-time cost, it would not
increase our FTEs, I am supportive; fully supportive. So I ask
people to think in terms of projects where we can add people to
complete the project and peel them off so that we do not have
to carry them.
Chairman Bond. We will follow up on that and I thank you
very much, Russ, for joining us.
Let me turn very briefly to the HUBZone program. Did the
Federal agencies meet the fiscal year 1999 goal of channeling 1
percent of Federal procurement dollars to HUBZones, and what is
the progress toward the 2000 goal of 1.5 percent? Welcome, and
if you would identify yourself for the record.
Mr. Ballentine. Thank you very much. Mr. Chairman, my name
is James Ballentine, Associate Deputy Administrator, Government
Contracting and Minority Enterprise Development. As you
mentioned in your statement, we launched the program on March
22 of last year. We anticipate in the 1999 fiscal year,
although we have not received the full data, that we will not
meet the 1 percent. The 1.5 percent is a lofty goal, but we are
feeling very good about the HUBZone program. We have more
businesses coming to the program and we feel that we will get
fairly close, although it is a new program.
Chairman Bond. Do you have any figures on how many HUBZone
contracts have been finalized to date this year?
Mr. Ballentine. We do not have final numbers. We will have
those actually next week which we will share with the
Committee.
[As of June 1, 2000, the requested information was not
provided by the SBA.]
Chairman Bond. Good. Thank you. I might ask, is the SBA
currently planning to adopt any order of preference that would
direct either the HUBZone or the 8(a) program to take
precedence over the other?
Ms. Alvarez. Mr. Chairman, nearly 2 years ago SBA adopted
an order of preference after following the regular process for
comment. So that order of preference has been in effect since
June 11, 1998.
Chairman Bond. What was that order of preference?
Ms. Alvarez. It was an order of preference which did give
preference to the 8(a) businesses. That came about as a result
of consultation with many Members of Congress, and we will
share with you some of the letters that were exchanged that
manifest the concern of a number of members that HUBZones not
harm the 8(a) program.
I believe that our experience to date, and this to some
degree is anecdotal because we do not have the final numbers,
is that the HUBZone program has benefited both 8(a) and non-
8(a) businesses, which is what we hoped would happen.
Chairman Bond. That is the point. But we crafted that
legislation, I wrote that legislation, I negotiated that
legislation both within the Congress on a bipartisan basis and
with the Administration and the legislation was clear that
neither program was to be given preference over the other. That
was the legislation we drafted and that was the legislation
that was signed into law. Not for a preference of one over the
other, but that they should work together.
Now let me ask, you requested $45 million for technical
assistance for approximately 8,000 Microloan borrowers and $30
million in technical assistance for the New Markets Venture
Capital program, but only $5 million for technical assistance
under the 7(j) program to cover about 6,000 8(a) firms plus
HUBZones. Does that not seem a little out of whack?
Ms. Alvarez. No, because we are talking about different
kinds of technical assistance, different needs for different
entrepreneurs. Frankly, we would like to have asked for more
money for the 7(j) program, but we are trying to work with our
previous history and slowly build more support. We are also
taking some new directions in the 7(j) program which we think
will be effective in helping these minority-owned businesses.
Maybe James would like to comment.
Mr. Ballentine. As the Administrator mentioned, we are
taking a new direction with the 7(j) program. In this current
fiscal year we received $3.6 million. We are requesting $5
million to implement some of the changes that we hope to put in
place for fiscal year 2000 and fiscal year 2001, in fact. And
hopefully we can build the program enough to demonstrate that
it is a worthy enough program to receive increased funding in
the outyears.
Chairman Bond. I would just say that you have requested $30
million in technical assistance for a new program that is not
even going yet and only $5 million for the targeted programs
that are authorized, that we expect the SBA to act on. I find
it stunning that six times as much money would be requested for
technical assistance for a program that is not even authorized.
So we are going to work on that problem in the budget process.
How much of the $5 million requested in the budget--have
you allocated for the HUBZone or the 8(a) program, and what
percentage of the assistance that you had in the past went to
the two programs?
Ms. Alvarez. You are talking about 7(j) monies?
Chairman Bond. 7(j), yes.
Ms. Alvarez. I do not think we have made those kinds of
distinctions. The businesses that benefit from the 7(j) program
by and large are much more sophisticated than a micro-
enterprise. The micro-enterprises require a different kind of
technical assistance with different providers. We have turned
to universities, for example, to be the principal source, the
Dartmouth Business School of Education for these 8(a) and
small, disadvantaged businesses. So there are just different
needs for different levels of sophistication.
With newer startup micro-enterprises it is going to be more
costly. It is more labor intensive. It is just a different kind
of training.
Chairman Bond. I understood that your new market programs
bring in big businesses to communities and----
Ms. Alvarez. We are looking through BusinessLINC to
hopefully establish----
Chairman Bond [continuing]. Bringing in sophisticated----
Ms. Alvarez [continuing]. Establish some mentoring and
partnering relations with small businesses. Again, you do not
expect a big business to take under its wing a tiny business.
They are more likely to work with--we saw an example of the
type of benefits right here in Washington. A small company
based in Southeast Washington that hires some folks who were
from welfare and they make mops. And as a result of a
partnering relationship with Giant supermarkets they were able
to grow their business because they ended up with contracts to
any number of Giant supermarkets. They are still a small
business, but that is a much more sophisticated company in some
respects than the ones we are talking about in the micro-arena.
Chairman Bond. I am just saying that if you are bringing in
established businesses under the new markets, to give them six
times as much technical assistance as you give the small
businesses and the 7(j) program and the HUBZones and 8(a) just
does not make any sense to me. I will be happy to have your
explanation and any further follow-up. We are going to pursue
that along with a number of other problem areas. As I mentioned
to Senator Kerry, I want to make sure that I get a review from
GAO how these subjects are working.
Unfortunately, I have three more hearings to participate in
this morning, and since my other colleagues seem to have opted
not to present their questions in person we will hold the
record open. We thank you, Madam Administrator----
Ms. Alvarez. Thank you, Senator.
Chairman Bond [continuing]. For your participation and the
good working relationship that we have. We will get all of
these questions to you tomorrow and ask that you to return your
responses in a week.
There being no further business to come before the
Committee, it is hereby adjourned. Thank you.
[Whereupon, at 10:27 a.m., the Committee was adjourned.]
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