Democratic View
March 14, 2001
Honorable James Nussle Honorable John M. Spratt, Jr.
Chairman Ranking Democratic Member
Committee on the Budget Committee on the Budget
U.S. House of Representatives U.S. House of Representatives
Washington, DC 20515 Washington, DC 20515
Budget Views and Estimates
Dear Chairman Nussle and Ranking Democratic
Member Spratt:
As the Ranking Democratic Member on the
Committee on Small Business, I am submitting separate
views and estimates based on the limited Small Business
Administration Fiscal Year 2001 budget submission. Although
there were some limited areas in which Committee Democrats
concurred with the Chairman, there were numerous other
areas in which we greatly differed; for that reason I
have prepared the following views and estimates.
This years Small Business Administration
budget is clearly the worst seen, not only in my 3 years
as Ranking Member but in my 9 years of service on the
Committee. The proposed budget cuts 340 million in funding
to small businesses. A 43 percent cut, more than twice
the cut to any other agency. Several critical components
that were part of a bipartisan agreement targeted at assisting
low-income communities has been terminated. For the Administration
to choose to end these programs represents a breech of
that agreement. The proposed budget would also impose
new fees and increase existing fees on small businesses.
Committee Democrats are unilaterally opposed to these
fee, and it is the opinion of the Members that this represents
a tax on small businesses.
It is unfortunate that given the vast role
that small businesses play in this nation's economy the
Administration's budget fails to recognize this and provide
adequate support to the programs which have helped this
nation's small businesses succeed.
Access to Capital
7(a) LOANS
The Minority is extremely concerned about the devastating
impact that the administration's proposal to eliminate
appropriations for the 7(a) guaranteed loan program will
have on this nation's small business. Access to capital
remains one of the greatest challenges facing today's
small businesses. The move to terminate the programs subsidy
will jeopardize a significant avenue of assistance for
small businesses. Over recent years, appropriations for
this program have been reduced and program fees have been
increased to maintain program level. However concomitantly,
continued administration errors in calculating the program's
subsidy rate have worsened and the projected subsidy rate
upon which the authorizing and appropriations committees
rely to establish program levels have resulted in borrowers
and lenders paying far too high fees. According to a Congressional
Budget Office September 2000 study entitled "Credit
Subsidy Reestimates 1993-1999," 7(a) lenders and
borrowers have paid nearly $1 billion in excess fees to
the government because of subsidy rate miscalculations.
We repeatedly brought this fact to the attention of the
previous administration. Specifically CBO said:
SBA's Section 7(a) program, which is discretionary,
guarantees about $10
Billion in new business loans annually. Downward reestimate
for that
program have been getting successively larger and extending
to more cohorts.
Unlike the generally upward reestimates for cohorts of
the Mutual Mortgage
Insurance Program, all SBA cohorts showed downward reestimates
in the most
recent available data. In all, reestimates for the program
totaled $965 million,
Or more than 1 percentage point of the program's original
subsidy rate. SBA has already recorded a reestimate of
about -$300 million for its various business
Loan programs in 2000 (emphasis added).
Moreover, this CBO finding supports the
testimony before our Committee by Aida Alvarez, the previous
SBA Administrator, who confirmed the program is being
run at a "profit" to the government. For loan
cohorts 1992 through 1998, federal appropriations for
the 7(a) program totaled $1.434 billion. According to
CBO, the downward reestimates for those cohorts through
FY 1999 totaled $1.27 billion The CBO study estimates
that the SBA will be taking another downward reestimate
of $802 million in FY 2000 for all of the SBA loan programs.
Since the 7(a) program is approximately 4 times larger
than the next biggest loan program at SBA, we reasonably
believe much of the FY 2000 reestimate will apply to the
7(a) program meaning that the gap between the total reestimate
since 1992 to 1998 and the total appropriated dollars
in that period will shrink even further.
The Administrations proposed fee increase
has the potential to lead to further overcharging of small
business borrowers who participate in the program. As
the U.S. economy enters a period of zero growth and perhaps
even a recession, we are concerned about the effect of
these proposed heightened fees on the availability of
capital to small businesses.
Inaccurate subsidy costs have already resulted in overpayment
of fees and elimination of flexibility in program delivery.
This, combined with the fee increases proposed by the
President's budget could make it difficult for the 7(a)
program to serve the small businesses that need it the
most. This change effectively levies a tax on the small
businesses who use the 7(a) program. This tax will cost
an average small business an additional $1400 in up-front
fees in the first year of a 7(a) loan, and an additional
$600 a year over the life of the loan. These are costs
over and above the current fees paid by the 7(a) borrowers.
As a result the Bush plan will cost the average small
business an additional $3,700 in fees over the life of
the average loan. We cannot support such a proposal.
We believe that the President should abandon
his proposal to make the 7(a) loan program completely
supported by fees, an fund the program through a direct
appropriation of $115 million for FY 2002. We also request
that the Administration include in the SBA FY 2002 budget
request an accurate accounting of the 7(a) subsidy rate.
We respectfully disagree with the Majority
that the SBA should achieve a goal of a zero subsidy rate
for the 7(a) loan program. Instead, we believe that the
current level of appropriations for the program should
be maintained, the fees should be reduced to accurately
reflect the cost of the program. To achieve a zero subsidy
rate for the 7(a) program simply means to increase the
fees on the small businesses that use the program. We
do not support such a proposal. The 7(a) program was created
to provide access to capital to those businesses who lack
access through more traditional means. Establishing as
a goal for Congress and the Administration to achieve
a zero subsidy rate for the 7(a) program runs counter
to the intent of Congress when the program was created.
A zero subsidy rate means higher fees charged to the small
businesses that already have difficulty paying the traditionally
high fees charged by banks and other lending institutions
for more traditional loans. Pushing for a zero subsidy
rate for the 7(a) program means shutting the door on the
very small businesses that the program was created to
serve. Under no circumstances will we support such a policy
goal.
504 LOANS
We join the Majority in supporting the Administration's
proposed $3.75 billion program authorization for the 504
loan program. Although this level is $1.25 billion under
the authorized level for the program, the 504 program
participants have indicated that the Administration's
budget will be adequate to serve the program's needs for
FY 2002.
Over the past three years, Congress has
been able to reduce the amount of the up-front fees paid
by the Certified Development Companies while maintaining
a net zero appropriations subsidy for these loans. Congress
and the 504 program participants have been fortunate in
this respect, and in the 2000 SBA Reauthorization bill
extended the current fee system through FY 2003.
We also join the Majority in their concern
over the subsidy rate estimates for the 504 program. While
we appreciate that the President's budget is intended
to lead to a slight reduction in fees charged to borrowers
and lenders in the 504 program, we are still concerned
that the subsidy rate estimates for this program are overly
conservative and consequently keep fees to small businesses
borrowers artificially high. Although improvements appear
to have been made in the program's liquidation performance,
the largest single factor in the subsidy rate equation,
we still believe that the Administration should take steps
to more accurately calculate the subsidy rate so that
small businesses are not being needlessly taxed for using
the 504 program.
We respectfully disagree with the Majority,
however, when they support the Administration's position
that no appropriation should be made for the 504 program.
The Minority Members of the Small Business Committee are
Concerned that an economic downturn will cause a decline
in the fees generated by the 504 program. Should this
happen, it would result in a funding shortfall for the
operation of the 504 program. The remedies for such a
problem would be: (1) to raise the program fees to make
up for the shortfall; or (2) to appropriate funds to make
up for the shortfall.
Obviously, he small businesses that use
the 504 program would oppose having their fees raised
under any circumstances. In addition, and more importantly
for the stability of the program, if the 504 program experiences
a shortfall in fees generated during an economic downturn
because fewer businesses are using the program, rasing
the fees will result in even fewer businesses using the
program. Therefore, an economic downturn could easily
send the 504 program spiraling into a deficit situation
and, in an attempt to generate revenue, turn away the
very companies that need assistance during a recession.
In order to avoid this situation, some of
the 504 lenders have indicated their support for a nominal
appropriations for the program that would serve as a "safety
net" or a "reserve" should the program
begin to operate at a deficit. We support the establishment
of such a "rainy day" fund for the 504 program
through a one-time direct appropriation.
SMALL BUSINESS INVESTMENT
COMPANY PROGRAM
We concur with the Majority and support the Administration's
request for an increased program level for both parts
of the SBIC program. The Administration's requested $600
million program level for the debenture program and the
$2.5 billion program level for the participating securities
program are more than adequate to serve the small businesses
that use the SBIC program for access to capital.
However, we object to the President's proposal
to eliminate all direct funding for the SBIC program and
require it to be funded through additional fees levied
on the small business that use the program. According
to SBA, this fee increase would be levied across the board
on SBIC loans of all sizes.
Under current law, the SBIC is funded through
a combination of user fees and direct appropriations.
The President's plan would eliminate all direct appropriations
and offset this cut by increasing the fees on all SBIC
loans. Under the President's plan, the increase absorbed
by small businesses using the SBIC program would be an
additional $3,300 per year. Over the life of a 10 year
loan, the President's plan would tax small businesses
an additional $30,000 in fees for using the SBIC program.
We do not support this proposal.
In addition, we are concerned about the
impact the increased fees will have on the low-income
minority- and women-owned small businesses that participate
in the SBIC-LMI program. The President's budget also proposes
to eliminate the New Markets Venture Capital Company program,
citing what they see as a duplication of other SBA low-income
lending programs, like the SBIC-LMI program. At the same
time, the President's budget will make it more difficult
for low-income small businesses to use the SBIC-LMI program
because of increased fees. By zeroing out the New Markets
program, and increasing the fees for the SBIC program,
the President's budget severely limits access to much-needed
venture capital for minority- and women-owned small businesses,
and businesses operating in low-income areas. These are
the very businesses that need venture capital assistance
the most. For this reason, we cannot support the President's
proposal to increase the fees charged under the SBIC program.
This decrease runs contrary to what the
Committee intended when we recently passed bi-partisan
legislation increasing the authorization levels for microloenders
and increasing the number of microloan intermediaries.
These changes were made through the SBA Reauthorization
Act of 2000 (P.L.106- ). While we share the Majority's
concerns that the Administration's request for decreased
funding will not allow the anticipated expansion of the
program, as expressed in P.L.106- ,we are also concerned
that a cut of this proportion will cause the program to
fall short of meeting the needs of the small business
community.
Not only would the President's proposed
$5 million cut leave the Microloan Direct Loan program
nearly $60 million under the authorized level, with an
average sized loan for the program at $10,000, this cut
means about 500 fewer loans will be made through the Microloan
program next year. In a program that only makes about
2,000 loans a year, the Bush cut represents a 25 percent
cut in the Microloan program. Simply put, this means that
25 percent fewer small business will have access to capital
through the Microloan program.
MICROLOAN TECHNICAL
ASSISTANCE
We respectfully disagree with the Majority's support for
the Administration's request of level funding for the
technical assistance component of the Microloan program
for FY 2002. The President's request of $20 million would
leave the technical assistance component $40 million under
the authorized funding level. This request does not keep
pace with inflation and falls well short of what is needed
to adequately serve the small businesses who seek assistance
under this important program.
NEW MARKETS VENTURE CAPITAL COMPANIES
We join the Majority in opposing the President's proposal
to eliminate the $30 million in technical assistance grant
funding for the New Markets Venture Capital Company (NMVCC)
program. Because this program is yet to become operational,
we concur with the Majority that eliminating technical
assistance funding for FY 2002 for this bi-partisan program
is premature.
The Small Business Committee has always
strongly supported programs with the goal of improving
access to capital in low- and moderate-income areas. The
NMVCC program was a bipartisan initiative of he Small
Business Committee designed to increase LMI investments.
As part of the landmark Community Renewal / New Markets
legislation passed by Congress late last year, we would
hope the President would honor the bi-partisan agreement
represented by the NMVCC program.
The funding for the loan guarantee portion
of the NMVCC program is considered "multi-year"
funding and can be used to back new markets debentures
until FY 2005. But, in order for the program to be effective,
the technical assistance component of the program must
be funded as well. Many studies have shown that low-income
entrepreneurs that receive technical assistance are much
more likely to survive past the first three years. By
providing no technical assistance funding for the program
for FY 2002, we believe the Administration is setting
the NMVCC program up to fail by not giving the program
the resources to provide much-needed technical assistance
to small businesses in LMI areas.
PRIME
We respectfully disagree with the Majority's support of
the Administration's proposal to eliminate the PRIME program.
While we understand the Majority's reservations about
this program's potential to duplicate other SBA programs,
we believe the authorizing legislation will adequately
prevent such duplication. However, because the regulations
for the PRIME program have never been finalized by SBA,
it is impossible to determine whether or not the program
will adequately serve low-income entrepreneurs without
duplicating existing programs.
If the PRIME program does not receive funding
for FY 2002, the authorization for the program will expire
with the program never having gotten started. We feel
it is premature to eliminate this bi-partisan program,
and support $15 million in funding for the PRIME for FY
2002. After one year of operation, we believe Congress
will have enough information to decide whether or not
the program should be reauthorized and continued.
DISASTER ASSISTANCE
We join the Majority in expressing concern over the Administration's
proposal to ask for only $300 million in authority for
the Disaster Loan program, and to create an emergency
discretionary account to fund any additional disaster
needs. First, we are concerned that the requested amount
of $300 million is significantly below the five-year average
for the SBA Disaster loan program of $900 million. Such
a low request virtually assures that the Agency will have
to seek additional funding through the government-wide
emergency reserve fund. Second, because the government-wide
reserve fund will serve all of the federal government's
disaster loan programs, the Administration's proposal
will place the SBA in direct competition for funds with
other programs. It is easy to contemplate a situation
where one disaster program gets funded, literally at the
expense of another.
Third, we are concerned that the proposed
general fund will total only $5.6 billion. This new disaster
funding scheme is said to include adequate funding for
a "normal" year of disaster spending for the
four major federal programs. However, the president's
plan leaves little room for error. To quote the Small
Business Administration, "The need for SBA disaster
loans is as unpredictable as the weather." For example,
in the aftermath of the Northridge earthquake, SBA approved
more than 125,000 loans for more than $4.1 billion in
FY 1994. Just one disaster of this magnitude would use
up more than 70% of the total general disaster fund set
aside by the Bush budget for the entire Fiscal Year 2002
for all federal disaster programs.
Fourth, we are concerned that the Administration
has not been able to explain how this new scheme will
be administered. We cannot support such a drastic, untested
proposal when the Administration cannot explain the details
of the plan.
We also share the Majority's concern about
the Administration's proposal to raise interest rates
on business disaster loans on individuals with no credit
available elsewhere. The President's budget would increase
the flat four percent interest rate on these loans to
a floating U.S. Treasury rate. It is the bi-partisan view
of the Small Business Committee that during a time of
natural disaster, Congress should not compound an already
difficult recovery period by imposing higher interest
rates on small business borrowers. The impact of this
interest rate increase could be devastating to small businesses
that have just suffered from a disaster. At he current
Treasury rate, the interest rate to small businesses would
go up to 5.5 percent. A 1.5 percent increase.
1.5 percent may not sound like much, but
it translates to more than $7,500 in additional fees to
small businesses over a 15 year period. That figure is
not $7,500 total in fees, but $7,500 in additional fees.
The Minority Members of the Small Business Committee cannot
support such a fee increase on small businesses that have
recently suffered a disaster.
Government Contracting and
Business Development
HUBZones
The Administration requests level funding
for this program at $2 million. The Minority believes
that this funding limits the potential for the HUBZone
Program to achieve its mission of allowing federal contract
preferences for firms located in areas of high unemployment
and low income throughout the country. Due to the limited
resources in FY 2000, the SBA was only able to approve
1,607 firms into the HUBZone Program, despite the fact
that there are 7,900 qualifiable HUBZone locations throughout
the country. Inadequate funding does not allow the HUBZone
Program to grow to its full potential. The Minority believes
that the HUBZone Program should be funded at $5 million,
the requested funding for FY 2001, rather than the $2,000
requested by the Administration for FY 2002. The consistent
under-funding of programs frequently leads to a lack of
appropriate management controls and increases the possibility
for mismanagement, fraud and abuse.
Small Disadvantaged
Business (SDB) Certification
Although the Administration lists a funding
request for the SDB Certification Program, the SBA's costs
for this Program are reimbursable back to the SBA by the
largest federal procuring agencies. The Minority has concerns
with the Administration's reimbursement request for FY
2002 of $1.8 million. The Minority does not believe that
this Program can perform its mission with a reimbursement
level that does not allow for adequate staffing for this
Program and, further, does not allow the SBA to perform
the requisite outreach to increase the numbers of firms
that are certified. While there have been questions as
to the appropriateness of the SBA certifying SDBs, the
Minority believes there should be some type of certification
process.
BusinessLINC
The Minority believes that termination
of funding for this Program will affect those businesses
in areas of the country that, despite a long period of
economic growth, have not yet achieved parity with the
rest of the nation. Those firms need the assistance provided
by BusinessLINC now, more than ever, with the current
economic downturn. The Administration claims that BusinessLINC
is redundant but, despite repeated requests, the Administration
has been unable to provide information on programs that
are duplicative of the mission of BusinessLINC.
Women's Procurement
Assistance
The Minority finds the Administration's
request of $500,000 for Women's Procurement Assistance
to be perplexing. Given that the new Women's Procurement
Program, established with the enactment of the Small Business
Reauthorization Act of 2000, has no associated administration
costs, we believe this funding can better be used for
other assistance programs such as the Women's Business
Centers.
PRO-Net
PRO-Net is an Internet-based database of
small businesses. Small businesses input their own business
information into the system, and it is then accessible
to potential buyers (federal agencies and large businesses).
PRO-Net is also the official registry for SDB-certified
firms and HUBZone-approved firms. The Minority does not
concur with this request until the SBA can provide information
that this $500,000 funding request allows the SBA to make
necessary enhancements to PRO-Net such an interface with
the Department of Defense's Central Contractor Registry.
7(j)
The Minority does not concur that the requested
funding level of $3.6 million is adequate to provide the
necessary management and technical assistance to businesses
that are participants in the SBA's 8(a) Program. The Minority
strongly believes that business development is an essential
part of the 8(a) Program. As most formal business development
in the Program comes from 7(j)-funded projects, the Minority
is concerned that with such a minimal funding level, the
SBA is forced to leverage and thereby dilute assistance
to one-week executive development seminars at various
colleges and universities around the country. The Minority
believes that by increasing this funding, at a minimum,
to the $5 million requested in FY 2001, businesses would
receive more appropriate, relevant, and on-going business
development training.
Office of Technology
The Office of Technology administers the
Small Business Innovation Research (SBIR) Program and
the Small Business Technology Transfer (STTR) Program.
The SBIR and STTR programs encourage the participation
of small business research and development firms in federal
research efforts. Despite the success of the SBIR and
STTR Programs, one of the most consistent concerns expressed
in GAO reports is the concentration of awards in few states.
As Congress has addressed this concern with the Federal
and State Technology (FAST) Partnership Program in the
Small Business Reauthorization Act of 2000, we believe
these programs should be adequately funded.
The Minority recommends, therefore, that
rather than funding both the FAST Program and the Rural
Outreach Program at a combined $5 million, $5 million
be appropriated for the FAST Program and an additional
$2 million be appropriated for the Rural Outreach Program.
This would fully fund the Rural Outreach Program to its
authorized level, and would increase funding to the FAST
Program by $1.5 million. The FAST Program is authorized
to $10 million for fiscal years 2001 through 2005. In
the first year, the FAST Program only received $3.5 million,
which is not adequate to assist those states that do not
have significant numbers of SBIR awards or those portions
of high-volume states such as low-income areas.
Salaries and Expenses
The Minority is concerned about the Administration's
request of $307,673,000, only an $11.3 million increase
to salaries and expenses (S&E). This request is only
3.69 percent over the appropriation for FY 2001. Included
within the S&E category are employee salaries, and
other operating expenses for the agency, including rents.
While the Majority believes the SBA staffing
to be adequate, as far as specific salaries the Minority
is concerned that, given the support of the last Chairman,
no additional funding has been included for Procurement
Center Representatives. With the current Chairman and
the Ranking both pledging to focus on contract bundling
which is such a significant issue to small businesses
who do business with the federal government, the role
of the Procurement Center Representative (PCR) is crucial.
PCRs are the first line of defense against contract bundling.
It is the job of PCRs to work with federal agencies to
ensure that small businesses get their fair share of federal
prime contracts. The Administration previously planned
to increase the number of PCRs by 13 in FY 2002. The proposed
funding does not include any room to hire additional PCRs
nor to allow for necessary additional travel dollars for
PCRs.
The Minority is also concerned about the
Administration's request of $2 million for retraining,
relocating, and buying-out employees. The Minority believes
that a comprehensive review of the SBA's workforce must
be performed and, based upon this review, a plan must
be submitted to the Committee that ensures that the need
for buy-outs, worker retraining, or Reductions in Force
are not directed towards any specific sector of employees.
Additionally, the Minority is concerned
that the 3.69 percent increase for S&Es, does not
allow appropriate room for the 3.6 percent proposed cost-of-living
increase in fiscal year 2002. Nor, does this allow for
anticipated regularly scheduled pay raises for employees,
or other increased rents. The Minority is aware that many
SBA offices currently lack funding to send out basic information
about the SBA's programs to potential customers. The operating
expenses for the agency are already tight, and the proposed
increase does not allow for much latitude over the already-scheduled
3.6 percent cost-of-living increase.
Conclusion
With the Small Business Administration taking
not only the largest cut of any agency in the President's
Budget - - - over twice the size of the next available
agency FEMA (20%). It is clear that with this deep of
an agency-wide cut that SBA will not be able to function
and sustain adequate levels of services for this antion's
small businesses. Small Businesses appear tobe unfairly
singled out to pay for the President's massive tax cuts,
as any tax relief that small businesses may gain will
be overshadowed by the loss of services and taxes disguised
as fees that will tack on thousands of dollars in cost
to small businesses.
It is also disturbing that within the massive agency cuts
those programs to assist minority businesses and businesses
backed in low income areas are especially the hardest
hit. Given the dominant role that small businesses have
played in the recent economic boom, the adoptation of
this budget will negatively impact a critical sector of
the economy that must be strengthened if the current economic
prosperity is to continue.
While the Views and Estimates of the Chairman
does express concern over increased fees to SBDC's, Disaster
Loan, 7(a) Program and the cuts to the New markets Venture
Capital Program and BusinessLINC, the fact that the Views
and Estimates to be filed witht hte Budget Committee supports
the Agency Budget. Democrats will need to file separate
views outlining our concerns over these cuts and continue
to strenuously object to the President's FY 2002 budget.
