39-010

2005
109TH CONGRESS 1ST SESSION
SENATE
Report

[Graphic image not available]

MARCH 30, 2005- Ordered to be printed

Filed under authority of the order of March 17, 2005

39-010

1st Session

109-49

--SUMMARY OF LEGISLATIVE AND OVERSIGHT ACTIVITIES DURING THE 108TH CONGRESS

I. OVERVIEW

During the 108th Congress, the Committee's agenda concentrated on the highest priorities of the small business community. The Committee focused on concerns such as entrepreneurial development, healthcare, small business manufacturing, the reauthorization of the Small Business Administration, access to capital, and stock option expensing. The Committee received testimony and information about these topics from small business owners, employees, and experts from across the United States. This report summarizes the legislative and oversight activities of the Committee on these key issues of concern and interest to small businesses.

II. OVERSIGHT OF THE SMALL BUSINESS ADMINISTRATION (SBA)

A. REAUTHORIZATION OF THE SMALL BUSINESS ADMINISTRATION

At the end of the 108th Congress, Congress approved comprehensive legislation reauthorizing the SBA for Fiscal Years 2005 and 2006. The SBA reauthorization was included in Division K of the Consolidated Appropriations Act for 2005 (the Omnibus Appropriations Act, Public Law 108-447) that was approved by Congress in December 2004, and signed by President Bush on December 9, 2004. The provisions of Division K reflect the significant amount of information that the Committee collected from the hearings, roundtable and discussions held throughout the 108th Congress, and had its origins in a non-comprehensive piece of legislation (S. 1375) previously adopted by the Committee and the Senate. The Committee's objectives were to single out the SBA programs that worked well, identify the reasons for their superior performance, and apply those principles to programs that need improvement.

While not all of the provisions of S. 1375 are contained in the Omnibus, Division K of H.R. 4818 includes updated authorization levels, improvements to the SBA's lending and technical assistance programs, and new initiatives to assist America's 21st Century entrepreneurs. Almost all of the provisions in Division K originated in several bills previously introduced by Senator Snowe, as detailed below.

Before December 2004, the last time that Congress passed legislation providing a comprehensive reauthorization of the SBA was in 2000. That previous legislation covered Fiscal Years 2001, 2002, and 2003, and expired on September 30, 2003. In early 2003, at the beginning of the 108th Congress, the Committee began the process of reauthorizing the SBA for Fiscal Year 2004 and subsequent years. The Committee held two roundtables in 2003 regarding SBA financing programs. The first roundtable was on April 30, 2003, and addressed the SBA's 7(a) Business Loan program and the SBA's Microloan Program. The second roundtable was held on May 1, 2003, and considered the SBA's 504 Loan Program, Small Business Investment Company (SBIC) Program, and New Markets Venture Capital Program. Chair Snowe chaired these roundtables and heard commentary about the SBA's budget proposals, and about the condition of the SBA's financing programs, from a wide range of program participants, small businesses, SBA employees, and financing experts.

The Committee also held a hearing, chaired by Senator Snowe, on June 4, 2003, that included testimony from SBA Administrator Hector Barreto regarding the agency's reauthorization. This hearing provided an additional opportunity for the agency to respond to issues raised during the previous roundtable discussions, discuss the legislative package that the SBA had submitted to the Committee for review, and comment on the President's Fiscal Year 2004 budget submission.

As a result of the roundtables, hearing, and extensive preparatory work done in conjunction with small businesses, small business trade groups, and industry experts, Chair Snowe introduced the `Small Business Administration 50th Anniversary Reauthorization Act of 2003' (S. 1375), which commemorated the 50th anniversary of the SBA and provided for a three-year reauthorization of the Agency, through Fiscal Year 2006. The bill had provisions that set out authorization levels for SBA programs, improved the operation of the programs, and provided for many improvements to the internal structure and activities of the SBA. The Committee held a mark-up for S. 1375 on July 12, 2004. The Committee reported the bill out of the Committee unanimously (19-0), and it was sent to the entire Senate for consideration. S. 1375 was unanimously approved by the Senate on September 26, 2003, before the SBA's then-current authorization expired on September 30, 2003.

S. 1375 was not taken up by the House, however, during the 108th Congress, and the House was also unable to pass the comprehensive SBA reauthorization bill, H.R. 2802, that was reported out of the House Small Business Committee in 2003. Therefore, the Senate and the House approved several short-term extensions of the SBA's authorization to enable the SBA to continue functioning, and to allow the SBA's programs to continue to be used by small businesses. These extensions continued throughout Fiscal Year 2004, as the House attempted to pass its SBA reauthorization bill.

On September 21, 2004, Chair Snowe and Senator Bond introduced the `Small Business Reauthorization and Manufacturing Assistance Act of 2004' (S. 2821), which was co-sponsored by Senator Roberts. This bill would have reauthorized the SBA for Fiscal Years 2005 and 2006, and would have improved SBA programs and the management structure of the SBA. The bill contained some provisions from S. 1375, some provisions from S. 2724, a bill that Chair Snowe and Senator Bond had introduced to assist small manufacturers, and which passed the Senate by unanimous consent on July 22, 2004, a few provisions from H.R. 4062, which had been approved by the House in March 2004, and by the Senate in April 2004, and had become law on April 5, 2004, and finally a few provisions from H.R. 2802, the SBA reauthorization bill reported out of the House Small Business Committee, which had never come up for a vote by the full House.

The SBA objected to provisions in S. 2821 that continued into Fiscal Year 2004 lower 7(a) borrower fees. These lower fees were first established in H.R. 4062, passed by Congress and enacted into law in April 2004, which had been enacted to allow the 7(a) program to operate through Fiscal Year 2004, even in the face of demand for loans that in 2004 far exceeded the SBA's original predictions. The SBA opposed the continuation of lower fees because those fee levels would require some appropriations for the 7(a) program. The Senate Committee on Appropriations and a majority of the Members of the House supported appropriations and lower fees for the 7(a) program, but the SBA supported making the program a zero-subsidy program, with no appropriations.

S. 2821 did not come up for a vote in the full Senate before the 108th Congress ended. As a result, the SBA's authorization had to be extended again at the end of Fiscal Year 2004, in the Continuing Resolution that provided a short-term extension for most federal agencies. Subsequently, House Small Business Committee members and industry groups conceded the issue of zero-subsidy for the 7(a) program and higher fees for 7(a) borrowers, and struck a deal with the SBA to support a particular package of provisions for the Omnibus Appropriations Bill (P.L. 108-447). That compromise was primarily based on the provisions of S. 2821, but Chair Snowe negotiated with the SBA to improve the package of provisions. The final product of those negotiations was included as Division K of the Omnibus Appropriations bill. The final package of provisions contained almost all of the provisions of S. 2821 (and hence it contained many provisions from S. 1375, because those sections had provided the foundation of S. 2821). In addition, Division K included sections that derive from S. 1977, the Small Manufacturers Assistance, Recovery, and Trade (`SMART') Act, introduced by Senator Snowe on November 25, 2003.

B. ACCESS TO CREDIT FOR SMALL BUSINESSES

Small businesses consistently mention access to affordable credit as one of their primary concerns. The SBA has several financing programs that seek to help small businesses obtain the credit that the businesses need to operate, grow, and hire more employees. Through the Small Business Investment Company (SBIC) program the SBA guarantees up to 66 percent of the financing of approximately 443 SBICs, which are venture capital firms that must invest all of their funds into small businesses. The SBICs obtain a portion of their funds from private investors and then obtain the SBA-guaranteed portion of their funds either through the sale of securities (in the Participating Securities SBIC program) or through the sale of debt (in the Debenture SBIC program).

In the 7(a) Business Loan Guaranty Program, which is organized under Section 7(a) of the Small Business Act, the SBA guarantees a portion of a loan that a commercial lender makes to a qualified small business (the guaranteed portion is 50 percent, 75 percent, or 85 percent of the total loan value, depending on the type of loan). Loans may be up to a maximum of $2 million, and the maximum guarantee is $1 million. To receive a 7(a) loan a small business must be unable to obtain comparable credit elsewhere from a non-SBA loan. Loans made under this program are most often for working capital, real estate, expansion, or other business expenses.

In 2004, the SBA guaranteed 76,143 7(a) loans, with a total value of approximately $12.5 billion. This was an increase of 23 percent over the 2003 total of 61,832 loans, for a total of $11.2 billion. The 7(a) program has several sub-programs or pilot programs in which loans have different features and are designed to respond to different types of financing needs. In the 7(a) Express pilot program, loans receive only a 50 percent guarantee and must be $350,000 or less, but the loan application is simpler than an application for a general 7(a) program loan. In 2003, 30,562 loans were made in the Express program, and in 2004 the number of Express loans increased by 39 percent to 42,458 loans.

One important sub-program within the 7(a) program is the International Trade Loan Program, in which small businesses can receive slightly larger guarantees, up to a maximum of $1,750,000, for loans that either support international trade or respond to competition from overseas competitors. In 2003, 1,583 loans were made in the International Trade Loan Program, and in 2004 the number of this type of loan increased by 38 percent to 2,177 loans.

In the Certified Development Company (CDC) loan program, also known as the 504 Loan Program (it is organized under Section 504 of the Small Business Investment Act of 1958), the SBA guarantees 40 percent of a financing package supplied to a small business to purchase either real estate or capital equipment. To obtain a 504 loan, a small business works with a CDC, a non-profit community development organization, to construct an appropriate financing package. The CDC provides a loan for 40 percent of the total financing package, and the SBA guarantees 100 percent of this portion of the total package; a commercial bank, separate from the CDC, provides a commercial loan that

funds 50 percent of the financing package, and the SBA guarantees no portion of this commercial loan. Finally, the small business is required to contribute 10 percent of the total financing package. In Fiscal Year 2003, 5,542 loans were made in the 504 loan program, for a total of $3.14 billion, and in 2004 the program increased in size by 26 percent, with 7,769 loans being approved, for a total of $3.9 billion, according to the SBA.

One focus of the SBA during the 108th Congress was to increase the number of SBA-guaranteed loans made to minorities and to women. From 2003 to 2004, among women and minority entrepreneurs, total 7(a) and 504 loan volumes increased by 27 percent. In 2003, women entrepreneurs received 14,221 SBA loans. In 2004, the numbers increased by 25 percent to 17,829 SBA loans. The increase was dramatic among loans to minorities as well. In 2003, African Americans received 3,482 SBA loans. In 2004, the number increased by 30 percent to 4,530 SBA loans. In 2003, Hispanics received 5,525 SBA loans. In 2004, the number increased by 30 percent to 7,157 SBA loans. In 2003, Asian Americans received 8,743 SBA loans. In 2004, the number increased by 30 percent to 11,349 SBA loans. In 2003, Native Americans received 737 SBA loans. In 2004, the number increased by 2 percent to 753 SBA loans.

In order to improve the SBA programs, Chair Snowe included in S. 1375 and in the Omnibus Appropriations Bill many provisions that would enhance the accessibility, attractiveness, and convenience of the financing programs for small business borrowers and for lenders. Of particular note is a provision that increased the maximum loan size for 504 loans, so as to allow small businesses, especially those in manufacturing that wish to purchase expensive machinery, or those located in regions in which real estate prices have increased dramatically, to obtain larger loans that reflect the increased costs of doing business.

C. SMALL BUSINESS REVITALIZATION ACT (S. 2193)

The ability of small businesses to access credit through the SBA's 7(a) program during Fiscal Year 2004 was hampered by a funding shortfall in the program. During Fiscal Year 2003 approximately $11.2 billion in 7(a) loans were approved (when $1.8 billion in STAR loans are included). The SBA's budget request for Fiscal Year 2004 was only for a program size of $9.3 billion, a reduction of almost $2 billion from the previous year. The SBA's Administrator, Hector Barreto, testified at the Committee's June 4, 2003 hearing on the SBA's Budget request for Fiscal Year 2004. In response to questioning from Chair Snowe regarding the potential inadequacy of the SBA's budget request for the 7(a) program, Mr. Barreto testified that the Administration felt its budget request would be sufficient to meet demands in the 7(a) program, both for large loans and for small loans. Moreover, at the Committee's April 30, 2003, roundtable on the 7(a) program, the SBA representative, the employee responsible for administering the SBA's Office of Capital Access, which manages the 7(a) program, assured the Committee that the Agency was confident that its Fiscal Year 2004 budget request was sufficient, even though 7(a) lenders at the roundtable insisted the demand would be much greater than the requested budget could finance.

On the express assurance of Administrator Barreto and the SBA, therefore, the appropriations bill that Congress enacted for Fiscal Year 2004 contained only enough funds for a 7(a) program of up to $9.55 billion in loans (in fact, the SBA had requested only enough funds to provide for a program of $9.3 billion, but Congress allocated more than was requested, thus allowing a program of $9.55 billion). Congress appropriated $79 million to the SBA for 7(a) guarantees in Fiscal Year 2004, and also allowed the SBA to carryover from Fiscal Year 2003 to Fiscal Year 2004 $22 million in funds and to apply the carried-over funds to 7(a) guarantees in the latter year. With this total amount of $101 million, and with a subsidy rate at the beginning of Fiscal Year 2004 of 1.06 percent, the program began the year with a total capacity of $9.55 billion. In Fiscal Year 2004, however, demand continued at the same pace it had reached in Fiscal Year 2003; thus, it was immediately clear that demand would outstrip available resources in the program, notwithstanding the SBA's predictions.

On December 23, 2003, the SBA informed the Senate and House Small Business Committees that the SBA would be instituting a $750,000 cap for 7(a) loans, effective January 8, 2004. The SBA informed the Committees on Tuesday, January 6, that the SBA was immediately shutting down the 7(a) loan program, for an undetermined amount of time.

On January 8, 2004, Chair Snowe sent a letter to Administrator Barreto in which she noted that the SBA had provided notice to the Committee on December 23, 2003, of its intention to impose a cap on 7(a) loans as of January 8, 2004. This notice of December 23, 2003 was required under Section 7(a)(24) of the Small Business Act, which provides that the SBA must notify the Committee at least 15 days before `making any significant policy or administrative change affecting the operation of the loan program under this subsection.' The letter of January 8, 2004 noted that the SBA had violated this statutory requirement by shutting down the program on or around January 5, 2004. Chair Snowe also noted that, while regrettable, the violation should not stand in the way of an immediate resumption of the program.

The SBA stated that between 500 and 1,000 loan applications were rejected because of the shutdown, with a total value of approximately $1 billion. Of these applications, approximately 250 were for loans larger than $750,000. The SBA sent these applications back to the small businesses that submitted them, and told the small businesses to re-submit the applications when the program re-opened. Those applications above $750,000 were then rejected by the SBA. Thus, at least 250 small businesses had loan applications rejected simply because the SBA moved the deadline for larger loans forward by several days.

The SBA claimed that it was required to shut the program down because the OMB would not allow the SBA to exceed $3.33 billion in 7(a) loan guarantees by January 31, 2004 until appropriators authorized additional funds. The SBA stated that, as of December 22,

2003, it had already approved $2.8 billion in 7(a) loan guarantees since the beginning of Fiscal Year 2004, and that between December 23, 2003, and early January 2004, it had received more than $500 million in applications, putting the program at the level of $3.33 billion at the beginning of January.

After the SBA reopened the 7(a) loan program on January 14, 2004, following its temporary shutdown, the SBA prohibited any loans larger than $750,000, instead of the normal $2 million, and prohibited `piggyback' loans, which combine commercial and 7(a) portions.

Small businesses and lenders stated to the Committee that the loan restrictions significantly hindered the ability of small businesses to obtain sufficient capital, and they expressed their strong desire to remove the loan restrictions.

In spring 2004 the SBA submitted a legislative proposal to Congress that, if enacted, would have given the SBA the authority to annually set the fees in the 7(a) program and to set the guarantee rates for 7(a) loans, i.e., the percentage of each loan that is guaranteed. Currently, a 7(a) loan of any size (normally, up to $2 million, if no additional loan cap is in place) may have a 75 percent guarantee, and loans of up to $350,000 can be made either at a 75 percent guarantee or a 50 percent guarantee. Loans of $150,000 or less may have a guarantee of up to 85 percent. The 50 percent guarantee loans are `SBA Express' loans.

SBA personnel explained that, although the details were not specified in the SBA's proposed legislation, the SBA would phase-in a requirement that, by FY 2007, every 7(a) loan would have to be made with a 50 percent guarantee (e.g., as SBA Express loans). The SBA would also increase fees for lenders and borrowers, at the SBA's own discretion, to give the 7(a) program a zero subsidy.

The Committee believed the language the SBA provided was significantly flawed because, among other things, (1) the SBA would have unfettered authority to set fees and guarantee rates; (2) small businesses with lesser credit quality could be excluded from the program by the lower guarantee percentage; and (3) the 15-day notice provision would be eliminated, so that the SBA would have no requirement to notify Congress.

Lenders use Express loans, with a 50 percent guarantee, primarily for loans of under $100,000; like credit card loans, these loans can be made by the lenders by reference to the borrower's credit score, rather than an evaluation of the borrower's collateral. Collateral is generally used for larger loans, which therefore are not made based on credit scores. The evaluation of collateral make the larger loans more work-intensive for lenders. Thus, lenders generally do not use Express for loans larger than $100,000.

Lenders informed the Committee that, if the SBA were to require that all loans up to $2 million were made at a 50 percent guarantee, the lenders would generally not make loans larger than $100,000, except for the small businesses with the best credit. The lenders stated that changing the guarantee rate from 75 percent to 50 percent would exclude a large number of small businesses, those with lesser credit quality or those that are just starting and do not have a credit history, from the program.

The Committee held a roundtable meeting of approximately 25 representatives of small businesses and lenders on February 25, 2004, to discuss the SBA's proposal. Every participant at the meeting, except the SBA, expressed concerns about the SBA's proposal. Some of these were strong objections: the representatives of community bankers stated that the proposal would be a `nonstarter' for the 5,000 U.S. community banks, and the American Bankers Association and other 7(a) lenders, represented by the National Association of Government Guaranteed Lenders (NAGGL), also stated that they were strongly opposed to the SBA's proposal. The small business representatives, especially the U.S. Chamber of Commerce, stated they were opposed to the proposal. No participant in the meeting, other than the SBA, supported the SBA's proposal.

In response to the loan cap that the SBA had established, and to the prohibition on piggyback loans, Chair Snowe introduced a bill, the `Small Business Loan Revitalization Act,' (S. 2193), on March 10, 2004, to adjust fees paid by lenders so as to allow the remaining appropriated funds in the 7(a) program to be used to fund an increased program size for the remainder of Fiscal Year 2004. Instead of a program size of $9.55 billion, S. 2193 would have allowed the 7(a) program to have a maximum size of approximately $12.5 billion for the year. An almost identical bill, H.R. 4062, was introduced in the House on March 30, 2004. S. 2193 was not passed in the Senate, so after H.R. 4062 was passed in the House on March 31, 2004, Chair Snowe called up H.R. 4062 for consideration in the Senate, and it was passed by the unanimous consent of the Senate on April 1, 2004. After being signed by President George W. Bush, it became law on April 5, 2004. The new law allowed the 7(a) program to have a program size of $12.5 billion for Fiscal Year 2004, and allowed the $750,000 loan cap to be removed, and piggyback loans to be permitted. Until January 2004, the SBA had permitted piggyback loans, but had never charged an additional fee for those loans. H.R. 4062 re-instituted piggybacks and, for the first time, imposed an additional fee that applied to piggybacks.

D. OTHER EFFORTS TO IMPROVE SMALL BUSINESSES' ACCESS TO CAPITAL

Chair Snowe, along with Senator Bond and Senator Pryor, also introduced a bill to improve small businesses' access to credit by increasing the amount of financing available to small businesses, and by improving the terms of the financing that is available. This bill, the `Small Business Credit Liquidity Act of 2003' (S. 1713), was introduced on October 3, 2003. The bill would have allowed the SBA to examine whether it wished to develop a program to authorize private-sector loan poolers to pool small business loans and securitize the loans. The loans thus pooled would not have been loans that already had partial or full SBA guarantees; they would have been made, originally, outside of the SBA's own loan and venture capital programs.

In addition, the bill specifically noted that it was not requiring the SBA to implement such a program, but was merely authorizing the SBA to examine the feasibility of such a

program, and to report back to Congress before implementing any such program. If the SBA wished, it could then implement a program to achieve these goals. The use of Federal appropriations to fund any such program was specifically forbidden by the legislation; any such program would have had to have been self-supporting, through fees charged in the program.

This proposal was first suggested by the SBA in its Budget Proposal for Fiscal Year 2004, but after provisions allowing the SBA to examine the possibility of beginning such a program were included in S. 1375, the SBA switched course and opposed the idea (in other words, the Agency opposed even being given the authority to examine the issue). The provision was removed from S. 1375 before S. 1713 was introduced. S. 1713 was referred to the Committee, but was not passed during the 108th Congress.

Chair Snowe and Senator Hagel introduced S. 1967, the `Interest on Business Checking Act of 2003', on November 25, 2003. This bill would have allowed financial institutions to pay interest on business checking accounts, which has been prohibited since the Great Depression. It would have benefited small businesses, who currently do not receive interest for the funds they hold in checking accounts, and would also have benefited small depository institutions, which would be better able to compete with larger depository institutions.

The bill did not progress through the Senate Banking Committee during the 108th Congress, but the House approved, by a 418-0 vote, an amendment to H.R. 1375, a regulatory-reduction bill in the House, that was almost identical to the text of S. 1967.

E. THE SBA'S ACCOUNTING ISSUES

The General Accounting Office (GAO), which is now named the Government Accountability Office issued a report in January 2003 (`Small Business Administration: Accounting Anomalies and Limited Operational Data Make Results of Loan Sales Uncertain') that identified serious deficiencies in the SBA's accounting for its sales of loans. These accounting problems affected more than just the loan sales; because the SBA did not properly account for the loans that had been sold in the sales, or for the Agency's loan loss reserve accounts, many of the Agency's financial accounts were inaccurate.

After the GAO's report identified errors in the SBA's accounting, the SBA's outside auditors, Cotton & Co., admitted that their audit opinions regarding the SBA for fiscal years 2000 and 2001 might be `materially incorrect.' Cotton & Co. withdrew their prior certification that the SBA's accounting was satisfactory, or accurate, for those two fiscal years. The SBA hired outside consultants to analyze the SBA's accounting errors.

Chair Snowe, along with Rep. Todd R. Platts, the Chairman of the House Subcommittee on Government Efficiency and Financial Management, Rep. Edolphus Towns, the Ranking Member of that Subcommittee, and Rep. Marsha Blackburn, the Vice-Chair of that Subcommittee, sent a letter to the GAO on May 21, 2003 concerning the SBA's loan sales program. The letter asked that the GAO, in light of its report on the loan sales, summarize the recommendations provided to the SBA by the outside consultants, assess whether the recommendations would be likely to result in reliable subsidy cost estimates for the SBA's accounts, determine whether the SBA was implementing the recommendations, and provide quarterly reports on the SBA's progress in fixing its accounting problems until such time as the SBA and the GAO `agree that all necessary corrective measures have been effectively implemented.'

In late July 2003, the SBA requested that the GAO delay the beginning of its study until `late August/early September 2003' because pertinent SBA personnel were occupied with other tasks. Along with the other requestors of the study, Chair Snowe reluctantly granted this request because the duration of the delay was not substantial and the SBA insisted that its accounting personnel were too busy to work with the GAO at that time.

In October 2003 the SBA requested that the start of the GAO's study be delayed again until December 1, 2003. The SBA stated this further delay was necessary because SBA's accounting personnel were occupied working on preexisting tasks, including the Fiscal Year 2003 financial statements, Fiscal Year 2005 budget, the migration of the agency's financial accounting system to a new contractor, and three other GAO studies (of the SBA's loan monitoring system, 7(a) loan program econometric model, and workforce transformation).

The House Subcommittee members agreed to delay the GAO study until, at the latest, December 1, 2003, so long as the SBA committed to allow the GAO full access to SBA personnel and documents. On November 20, 2003, the SBA informed the GAO that it did not intend to provide the GAO access to SBA accounting documents and personnel until after the OMB had approved the new disaster loan accounting model, which would not be until January 2004.

As a result, Chair Snowe wrote Mr. Barreto on November 24, 2003 stating that the GAO study (first requested in May 2003) was essential to Congress's decision-making responsibilities, and requesting that the study be allowed to begin immediately.

The SBA did not immediately reply to the letter, but in early January 2004 the SBA insisted that delaying GAO's commencement of the study until January 2004 was necessary because the new disaster loan models would not be completed and approved by the OMB until then. The SBA denied that the earlier requests for delays, in July 2003 and October 2003, were because SBA personnel were `too busy' at that time; the SBA claimed that its earlier requests to Congress for delays were based upon the financial models not being ready yet. The GAO continues to work with the SBA to examine these accounting issues.

F. GOVERNMENT-WIDE AUDIT ISSUE, AND GAO AND CBO REPORTS

The GAO is required to do a government-wide audit of all agencies each year, and its audit of the SBA was delayed many times in 2003 and 2004 by the SBA's refusal to allow the GAO access. After discussions with the Committee, the SBA agreed to provide more access to the GAO, and the latter completed its audits for 2003 and 2004.

On July 22, 2003, Chair Snowe sent a letter to David M. Walker, the Comptroller General, requesting that the GAO conduct a study of the SBA's contract with Dun & Bradstreet regarding the monitoring of the SBA's loan portfolio. To improve its ability to monitor its 7(a) and 504 loan portfolios, the SBA awarded a contract to Dun and Bradstreet, in association with Fair Isaac Corporation, to provide information from a computer-based loan monitoring system. The SBA's monitoring of potential risks associated with its loan portfolios and its management of information technology are both critical in ensuring that the SBA's primary business loan programs are fulfilling their intended goals of providing credit to eligible small businesses, and in ensuring that SBA lending partners follow lending requirements.

In a December 2002 report (Small Business Administration: Progress Made but Improvements Needed in Lender Oversight, GAO-03-90, Dec. 9, 2002), the GAO reported that the SBA needed to improve its lender oversight process to adequately measure the financial risk lenders pose to the SBA. In discussions with Committee staff in April 2003 about the status of the SBA's response to the GAO's recommendations for improvements in information technology management, the GAO reported that the SBA had decided to revise its approach to loan-monitoring after dedicating several years of effort and approximately $12.7 million towards development of an in-house loan monitoring information system.

In her July 2003 letter, Chair Snowe requested that the GAO conduct a study of the SBA's contract with Dun and Bradstreet in order to determine (1) what data is necessary to adequately monitor the 7(a) and 504 loan portfolio, (2) how the SBA intends to achieve the goal of developing or obtaining information that will meet the agency's needs, (3) the extent to which the contract addresses the SBA's longstanding data integrity problems, (4) to what degree the contract will improve the SBA's loan monitoring capability, and (5) how closely the SBA's intended future loan monitoring capability will resemble best practices of private U.S. banks.

The GAO analyzed these issues and completed its report in June 2004 (Small Business Administration: New Service for Lender Oversight Reflects Some Best Practices, but Strategy for Use Lags Behind, GAO-04-610). The GAO determined that the new loan monitoring system would be comparable in quality to those used in the private sector, but that the SBA had not yet developed comprehensive plans for utilizing the system to improve and monitor SBA programs. The SBA responded that it was still in the process of developing those plans. The Committee is continuing to work with the Agency on this vital issue.

On October 30, 2003, Chair Snowe sent a letter to Dr. Douglas Holtz-Eakin, the Director of the Congressional Budget Office (CBO), requesting that the CBO conduct a study on the effect on small businesses of the call-up to active duty of military reservists who are employees of small businesses. This is an issue of significant importance to thousands of small businesses, who may have lost their owners, managers, or key employees because those persons were reservists who were called up to active duty. The CBO is still conducting the study, and the Committee will examine its findings when the study is completed.

In October 2004, Chair Snowe and Senator Enzi requested that the GAO begin a study of the effects on small businesses of the Sarbanes-Oxley Act. The GAO has not yet completed the study, which will examine whether there have been positive and/or negative developments for small business accounting practices, costs, and access to capital as a result of the Sarbanes-Oxley Act.

G. SBIC PROGRAM

Small Business Investment Companies (SBICs) provide equity investments, long-term loans, and management assistance to small businesses. SBICs are privately owned and managed, investing in small businesses with the prospect of sharing in the profits as they grow. SBICs may be financed either by the sale of equity securities (Participating Securities) or debt instruments (Debentures). To be licensed by the SBA, each SBIC must raise private capital. The SBA then matches the private capital with government-guaranteed capital, by guaranteeing the SBIC's sale to investors of equity securities (or bonds, in the case of debenture SBICs). The SBIC program is a zero-subsidy program; the fees charged to SBICs pay for the SBA guarantees.

The SBIC program began in 1958, and has been a major contributor to the venture capital industry in the United States. SBIC investing peaked in 2000 at $5.4 billion, but then declined to $4.5 billion in Fiscal Year 2001, $2.7 billion in Fiscal Year 2002, $3.5 billion in Fiscal Year 2003, and $2.6 billion in Fiscal Year 2004. The decrease in SBIC investments during this period is less drastic than the decrease in private venture capital investments over the same period, and thus the relative importance of SBIC investments in the venture capital field is greater now than during the late 1990s. The SBA has estimated that one job is created for every $36,000 invested in a small company under the SBIC program. There are currently approximately 443 SBICs nationwide.

Since its beginning in FY 1994, the Participating Securities SBIC program has had impressive results: More than $4.7 billion in private capital has been raised by the 221 privately managed Participating Securities funds, and more than $7.4 billion has been invested by Participating Securities funds in U.S. small businesses during the period.

In 2004 the SBA indicated that the Administration's projections for the future of the Participating Securities SBIC Program (but not the Debenture SBIC Program) predicted that the program would operate at a substantial loss for the Government. These

projections were based upon the program's past performance and the economic events of the period 1994-2004; they may also have contained some predicted results for the performance of SBICs in the future. The SBA indicated that this projected loss could exceed $1 billion. In response to this expectation, the SBA submitted to Congress a legislative proposal to change the Participating Securities SBIC program by increasing the fees charged to SBICs, and increasing the government's share of an SBIC's profits. In a series of meetings, representatives of SBICs strongly opposed the Administration's proposal, arguing that it would effectively end the program by rendering it completely unpalatable for venture capitalists.

On June 25, 2004, Chair Snowe and Senator John Kerry sent a letter to SBA Administrator Hector Barreto that contained draft legislative text regarding the SBIC program. The legislative proposal, which was constructed by SBICs and suggested to the Committee, would have amended the Small Business Investment Company Act of 1958, under which the SBIC program is organized, and would have increased the SBA's profit participation in the SBIC program by promising the SBA a profit participation in each SBIC equal to the percentage of financing in that SBIC that the SBA had contributed. The Senators requested a section-by-section analysis of the draft legislation.

On July 8, 2004, Ronald E. Bew, the SBA's Associate Deputy Administrator for Capital Access, sent Chair Snowe and Senator Kerry a letter stating that, in the SBA's view, the draft legislation did not satisfy the requirements of the Credit Reform Act and, if the draft legislation were to satisfy that Act, it would have a positive subsidy rate of approximately 21%. Mr. Bew's letter also contained a statement, without explanation, indicating that the proposed draft legislation would `shift' a budgetary cost from the U.S. Treasury to the SBA.

On July 12, 2004, Chair Snowe and Senator Kerry sent another letter to Administrator Barreto requesting that Mr. Barreto explain in more detail the SBA's conclusion that the draft legislation sent on June 25, 2004, did not satisfy the Credit Reform Act of 1990, and how, in contrast, the current law governing the program does satisfy that Act. The senators also reiterated their request for a section-by-section analysis of the draft legislation. The letter also asked that the SBA identify what aspect of the proposed draft legislation would `shift' a budgetary cost from the U.S. Treasury to the SBA. Finally, the letter asked the SBA to explain in greater detail the manner in which the SBA calculated that the draft legislation, if scored under the credit reform standards as debt, would still have an estimated subsidy rate of 21%. The letter requested a reply by July 19, 2004.

On July 27, 2004, Chair Snowe, Senator Kit Bond, Senator Judd Gregg, Senator James Talent, and Senator Norm Coleman sent a letter to Joshua Bolten, Director of the Office of Management and Budget (OMB), regarding the SBIC program. The letter noted that the private investment community, the Administration, and Congress all agree that the program needs a legislative solution. The letter also mentioned that the private sector participants in the program had testified before Congress in opposition to the Administration's proposal, and had indicated that the flow of private capital into the program would stop if the Administration's recommended changes were enacted. The Senators stated that they are attempting to construct an alternative approach that would achieve the following objectives: (1) maintain incentives necessary to continue to attract private investment in SBICs; (2) eliminate taxpayers' exposure by maintaining a zero subsidy rate for the program; and (3) maintain strict licensing procedures to ensure only qualified venture capital managers are allowed to participate. The Senators requested that the OMB engage with congressional staff and industry representatives in the effort to design legislation to improve this program. Subsequently, OMB personnel have communicated with Congressional staffers regarding the program, and that process is still on-going.

H. OVERSIGHT OF THE 7(A) PROGRAM

On September 9, 2004, Chair Snowe sent a letter to Administrator Barreto requesting he provide her with (1) information regarding an email that was apparently sent in late August 2004 from the District Director of the SBA's San Diego District Office, as well as the Deputy District Director and the chief loan officer in that District Office, to many of the lenders participating in the 7(a) loan program in that region; and (2) information regarding any similar messages that might have been sent in other SBA Districts. The email sent to lenders encouraged lenders to submit as many 7(a) loan applications during Fiscal Year 2004 as possible, and mentioned that in order to find additional applications to submit lenders might wish to consider changing the credit thresholds the lenders used to determine loan applicants' eligibility for loans. The letter requested that Mr. Barreto examine the circumstances under which the SBA officials sent the email to lenders, and also asked Mr. Barreto to determine whether other SBA district offices had made similar communications to lenders in other regions. Chair Snowe requested a reply by September 15, 2004.

On September 14, 2004, Donald R. Swain, the Director of the SBA's Executive Secretariat, sent Chair Snowe a letter informing her that the SBA expected to reply to her inquiry `fully within 14 days.' Administrator Barreto sent Chair Snowe a letter on October 8, 2004, informing her that the messages in the August 2004 email to lenders were not in conformance with SBA policy, and that the SBA had informed the employees in question that they should refrain from such messages.

III. TAX ISSUES

A. SMALL BUSINESS EXPENSING

The Committee was extremely active throughout the 108th Congress in terms of improving the ability of small businesses to deduct more of their costs in acquiring capital used in their business in the year of purchase. On January 14, 2003, Chair Snowe introduced S. 158, The Small Business Expensing Act of 2003. In short, this bill would

have extended the then $25,000 expensing limit to $75,000 and the then $200,000 phase-out to $325,000. The bill would have made the changes permanent.

Although never passed, this bill played a large role in the small business expensing modifications that were included in the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), which Congress passed and the President signed on May 30, 2004. JGTRAA provided that the $25,000 expensing limit would be increased to $100,000 and the $200,000 phase-out would be increased to $400,000.

These increases, however, became effective only until the end of tax year 2005. As such, absent further legislation, the levels would revert back to their respective $25,000 and $200,000 amounts beginning in 2006.

On October 22, 2004, the President signed H.R. 4520. One of the measures included in that bill is a provision to extend the expensing limits enacted by JGTRRA for an additional two years. Accordingly, the current $100,000 expensing limit and $400,000 phase-out will remain in effect through the end of tax year 2007.

Chair Snowe also offered an amendment to the Senate version of H.R. 4520 (S. 1637) during the Finance Committee mark-up that would have modified the small business expensing rules. This amendment would have changed the rate upon which the taxpayer's expensing amount would phase-out to allow more companies to qualify. Currently, the taxpayer's expensing benefit phases-out dollar-for-dollar, but Chair Snowe's amendment would have altered that rate so that the amount that would otherwise qualify for expensing would be phased-out by only one half of the amount by which the cost exceeds the phase-out limit. Although this amendment was included in the Senate's bill, it was not included in the Conference Report.

B. MODIFICATION OF THE UNRELATED BUSINESS TAXABLE INCOME RULE

On April 10, 2003, the Committee introduced S. 885--The Small Business Investment Company Act of 2003. This bill would have amended the unrelated business taxable income rules to provide that tax-exempt entities would not be subject to paying unrelated business taxable income from investments made in debenture small business investment companies.

Although Congress never passed S. 885, Chair Snowe was successful in including the provisions in the Senate passed version of H.R. 4520. The Conference Report to H.R. 4520 (P.L. 108-357) contained a modified provision to address the problem. In general, the measure contained in H.R. 4520 modifies the debt-finance property provisions in the unrelated business taxable income rules in the code by excluding from the definition of acquisition indebtedness any indebtedness that a small business investment company licensed under the Small Business Investment Act of 1958 that is evidenced by a debenture issued by such company under section 303(a) of such act and held or guaranteed by the Small Business Administration. The exclusion will not apply, however, if any exempt organization owns more than 25 percent of the capital or profits interest in the small business investment company, or exempt organizations own, in the aggregate, 50 percent or more of the capital or profits interest of the small business investment company. This exclusion applies to small business investment companies licensed after October 22, 2004.

C. MANUFACTURING TAX DEDUCTION

H.R. 4520 provides an income tax deduction that domestic manufacturers are able to claim in order to increase their competitiveness abroad. The deduction is from taxable income (or, in the case of an individual from adjusted gross income) that is equal to a portion of the taxpayer's qualified production activities income. For taxable years beginning after 2009, the deduction is equal to nine percent of the lesser of (1) the qualified production activities income of the taxpayer for the taxable year, or (2) taxable income (determined without regard to this provision) for the taxable year. For taxable years beginning in 2005 and 2006, the deduction is three percent of income, and the deduction is six percent of income for taxable years beginning in 2007, 2008, and 2009. The deduction is limited, however, to 50 percent of the wages that the taxpayer pays during the calendar year that ends in such taxable year.

Chair Snowe worked diligently both during the Senate Finance Committee mark-up as well as during the Conference negotiations to ensure the deduction would not be limited to only certain types of entities. The deduction enacted under H.R. 4520 is not entity-specific and applies to those manufacturers that pay wages. Consequently, not only are corporations eligible to claim the deduction, but so too are shareholders in a sub-chapter S corporation eligible for the deduction as well as partners in a partnership.

D. MODIFICATIONS TO THE NEW MARKETS TAX CREDIT

The Committee was extremely influential in modifying the application of the new markets tax credit program in terms of making it accessible than more taxpayers than under current law.

Specifically, Chair Snowe worked as a conferee to H.R. 4520 to modify the low-income test for high migration rural counties. As provided under the bill, in the case of a population census tract located within a high migration rural county, low income is defined by reference to 85 percent (rather than 80 percent) of statewide median family income. For this purpose, a high migration rural county is any county that, during the 20-year period ending with the year in which the most recent census was conducted, has a net out-migration of inhabitants from the country of at least 10 percent of the population of the county at the beginning of such period.

E. CASH METHOD OF ACCOUNTING (S. 2675)

On July 15, 2004, Chair Snowe introduced S. 2675 to expand the availability of the cash method of accounting for small businesses. Currently, the general rule under the tax code is that only those small businesses that generally earn less than $5,000,000 in annual gross receipts are able to use the cash method of accounting in determining their federal income tax liability. Chair Snowe's bill would increase this threshold to $10,000,000.

Chair Snowe's bill also permits those taxpayers that have inventory to potentially qualify for the cash method of accounting. Currently, if a taxpayer otherwise satisfies the requirements for using the cash method of accounting but also has inventory in its business, it cannot use the cash method. Chair Snowe's bill provides an exception for those taxpayers that have inventory by permitting them to account for those costs as if they are an incidental material supply, which is a standard that exists under current law.

F. INVESTIGATION OF THE TAX CODE

Chair Snowe, in her role as Committee Chair requested several GAO reports related to the tax code. One report reviewed the Internal Revenue Service's management of its Schedule K-1 Document Matching program, which the IRS began in 2002 to compare the information that certain tax flow-through entities, such as partnerships and S-corporations, provide on their IRS form K-1 to what their respective owners report on their individual income tax returns. Regrettably, during the first year of this program, a significant number of taxpayers received notices from the IRS questioning the accuracy of their reported income and requiring them to prove that they had, indeed, filed their returns correctly.

In light of these problems, Chair Snowe and Senator Bond requested that the GAO determine the extent to which this program burdened compliant taxpayers and the steps that the IRS should take to improve the program. The GAO report, entitled `Changes to IRS's Schedule K-1 Document Matching Program Burdened Compliant Taxpayers' (GAO-03-667), explains that although the IRS intended originally to focus on only two categories of income that are easily identified on tax returns, namely interest and dividends, the IRS determined during the testing of the program that this approach was not optimal because it could not separate underreported K-1 interest and dividend income from the other underrreported income such as the income that banks pay. Because the IRS expanded the matching program to cover additional categories of income and in the process thereof sent thousands of under-reporting notices to thousands of taxpayers who were eventually found to have met their tax obligations, the report concluded that the expansion of the matching program created an unnecessary burden for those compliant taxpayers and that this expansion also reduced the IRS' already limited enforcement resources.

Although encouraged that the IRS recognized the shortcomings in implementing the matching program for 2002 and took steps towards improving the program's efficiency and accuracy for 2003, Chair Snowe and Senator Bond wanted to ensure that the IRS continued to implement the suggestions and conclusions made in the Report. Accordingly, Chair Snowe and Senator Bond sent a letter to IRS Commissioner Everson on July 9, 2003 to applaud the IRS for its work in this area and stress the importance of acting on the GAO's conclusions.

Chair Snowe and Senator Bond also requested a GAO report that reviewed the Workforce Planning initiative within the Taxpayer Education and Communication Unit (TEC) of the IRS. The purpose of this Report (GAO-03-711) was to determine whether the IRS has begun to develop a strategic workforce plan for TEC that incorporates the critical elements that should be in a typical workforce plan and to determine how the IRS should proceed with the plan's development.

The Report concluded that while both the IRS and the Small Business/Self-Employed (SB/SE) division have begun to develop this strategic workforce plan, TEC, since its inception in October 2000, has operated with a short-term staffing plan that does not meet the critical elements for what a strategic workforce plan should include.

Concerned with this conclusion, Senators Snowe and Bond sent a letter to IRS Commissioner Everson and IRS SB/SE Commissioner Hart on July 18, 2003. While the letter commended the IRS for recognizing the need to develop and institute a strategic workforce plan for TEC, it stressed the importance of implementing the GAO's recommendations concerning the plan's element for a proper strategic workforce.

An additional GAO Report that Chair Snowe requested focused on the compliance burden that the Federal tax system imposes on small businesses and the self-employed. Chair Snowe made this request because of her interest in alleviating any unnecessary burden that federal tax requirements impose on small businesses.

The GAO's report (GAO-04-304) concluded that the expenses that small businesses reported on schedules C and F of their tax returns varied widely across and within expense categories for tax year 2001. Specifically, the Report concluded that there was a wide variation in both median dollar amounts and ranges of the expenses, and the expenses varied greatly within the categories of expenses, such as the expenses for wages that taxpayers reported on Schedule C.

The final GAO report that Chair Snowe requested focused on the substantiation of business expenses by small business taxpayers and whether changing the rules that taxpayers must follow in meeting their tax obligation would actually improve taxpayer compliance.

G. NOTIFICATION TO SMALL BUSINESSES OF ERRONEOUS ALTERNATIVE MINIMUM TAX (AMT) PAYMENTS

On May 29, 2003, Chair Snowe sent a letter to Commissioner Everson regarding the number of small corporate taxpayers that erroneously paid the Alternative Minimum Tax (AMT). The letter stemmed from a report that the Treasury Inspector General for Tax Administration (TIGTA) issued titled `Significant Actions Were Taken to Address Small Corporations Erroneously Paying the Alternative Minimum Tax, but Additional Actions are Still Needed' (Reference Number 2003-30-114). In general, the Report concludes that the IRS failed to contact all of the small corporations that erroneously paid the corporate AMT in 2001 and failed to identify those taxpayers that might have erroneously paid the corporate AMT for tax periods after November, 2000.

Chair Snowe's letter stressed the necessity of improving this oversight. For example, many of these small corporations likely have a limited cash flow--meaning they could have reinvested this tax liability that they were not required to pay into their business rather than with the Federal Government. Moreover, subjecting these taxpayers to the AMT imposes additional administrative costs and burdens that otherwise would not have been required. Consequently, Chair Snowe urged Commissioner Everson to implement the recommendations of TIGTA's report to ensure that small corporations that erroneously paid the AMT are notified of their mistake and issued a prompt refund.

IV. WOMEN'S BUSINESS CENTER

According to the Center for Women's Business Research, in 2004 there were 10.6 million women-owned businesses, generating almost $2.5 trillion in revenues and employing more than 19 million Americans. With women entrepreneurs making significant contributions to the economy and growing at twice the rate of all other firms, Chair Snowe wanted to ensure that programs such as the SBA's Women's Business Center program continued to help these women succeed. During the 108th Congress, she introduced three bills related to improving programs and services for women in small business.

In addition, Chair Snowe sent several letters to Administrator Barretto in an effort to resolve the funding shortfall with the Women's Business Center Program.

A. WOMEN'S SMALL BUSINESS PROGRAMS IMPROVEMENT ACT OF 2003

On May 23, 2003, Senator Snowe, along with Senators Bond and Burns introduced S. 1154, the Women's Small Business Program Improvement Act of 2003. This bill was designed to improve the programs and services that the SBA delivers across the nation for women business owners through the Office of Women's Business Ownership, the Women's Business Centers Program, the National Women's Business Council, and the Interagency Committee on Women's Business Enterprise. The bill provided consolidation, direction and integration of existing programs that have previously been created to offer opportunities for women through their entrepreneurial endeavors. Additionally, the bill made the Women's Business Center Program a permanent program for existing eligible Centers so that women can depend on the experienced services of long-term counseling and small business education and training. These Centers have proven to be a great value to the communities they serve and this bill ensures that these programs and services continue to be available.

B. WOMEN'S BUSINESS CENTER PRESERVATION ACT OF 2003 (S. 1247)

On June 12, 2003, Chair Snowe introduced S. 1247, the Women's Business Center Preservation Act of 2003. This bill modified the percentage of funds for the Women's Business Centers (WBC) Program that the SBA can use for sustainability grants in Fiscal Year 2003. Under section 29(k) of the Small Business Act, funding for the WBC Program is split between initial grants for new Women's Business Centers and sustainability grants for Centers that have completed their original grant. As a result of this allocation, only 30.2 percent of the program's $12 million in appropriated funds could be used for sustainability grants. The bill modified this allocation by increasing the percentage for sustainability grants to 36 percent in order to address the funding shortfall that put a number of WBCs in jeopardy in Fiscal Year 2003. S. 1247 was limited only to Fiscal Year 2003 and pertained only to funds already appropriated to the SBA for the WBC program.

C. THE WOMEN'S SUSTAINABILITY RECOVERY ACT OF 2004 (S. 2267)

On April 30, 2004, the Senate unanimously passed S. 2267, the Women's Sustainability Recovery Act of 2004, a bill introduced by Chair Snowe and included a bipartisan co-sponsorship of 14 Senators. This legislation, similar to S. 1247, the Women's Business Center Preservation Act of 2003, assured that each of the existing eligible women's sustainability centers had the opportunity to compete for a sufficient pool of funds. For Fiscal Year 2004, the SBA was appropriated $12.5 million for the Women's Program. Under outdated legislation, only 30.2 percent of the appropriated funds was available for sustainability. Because the SBA increased the number of awards to women's business centers over the past 3 years, the reserve which was legislatively mandated for the sustainability centers was inadequate for the growing number of centers. The bill increased the percentage reserved for sustainability centers to 48 percent of the programs appropriated funds for Fiscal Year 2004 sustainability grants.

D. SBA'S WOMEN'S BUSINESS CENTER PROGRAM GRANTS FOR FISCAL YEAR 2004

On April 14, 2004, Chair Snowe and Ranking Member Kerry sent a letter to SBA Administrator Barreto requesting the agency's plans for funding new, regular and sustainability women's business centers. The SBA opened the application period for

Fiscal Year 2004 Women's Business Center (WBC) grants on April 1, 2004. The SBA's intentions at the time were to renew 35 regularly funded women's business center grants, renew 32 of the sustainability center grants, and award 21 new, regularly funded women's business center grants. However, Chair Snowe and Senator Kerry's concern was that the agency's most experienced women's business centers will be insufficiently funded. Under the current formula, 53 sustainability centers in 39 states would be competing for a pool of funds that only provides for 32 full sustainability grants. As a result, many of the most effective and experienced centers that have been the source of business development in their communities and States were in jeopardy of closing.

On June 30, 2004, Chair Snowe was joined by 12 other Senators in sending a letter to Administrator Barreto requesting that the SBA assist in advocating for compromise language that increased the percentage reserved for sustainability grants from 30.2 percent to 48 percent. With the SBA's assistance, a new compromise bill was drafted that addressed the immediate women's business center funding issue for Fiscal Year 2004. However, the SBA still made plans to make women business center grant awards without the implementation of the compromise language. Under the funding formula, 53 sustainability centers in 39 states would be competing for a pool of funds that only provides for 32 full sustainability grants. Therefore, the agency's most experienced women's business centers would be insufficiently funded and in jeopardy of closing.

V. SBA TRANSFORMATION

A. IMPLEMENTATION OF SBA'S TRANSFORMATION INITIATIVE

Recognizing the need to transform the agency and its workforce to meet the modern demands of small businesses, the SBA announced a 5-year workforce transformation initiative in July 2002. On July 23, 2003, the SBA delivered an incomplete and basic outline of their upcoming plans to move into the second phase of the agency's transformation initiative. The plan included: strategic human capital planning and organizational alignment through the centralizing of liquidation functions thereby, removing this function from the district office; and improving services to small business customers by focusing the staff on partner management and outreach. On August 1, 2003, Chair Snowe, sent a letter to SBA Administrator Hector V. Barreto requesting detailed information on the SBA's plans to centralized the loan liquidation and purchase guarantee functions.

The first phase of the plan began in March 2003, as a pilot program in three district offices in North Carolina, South Florida, and Arizona. The pilot included an initial training period followed by the centralization of 7(a) liquidation and purchase activity in Santa Ana, California, and of the equivalent 504 program activity in Sacramento, California. Although it was clear that the SBA needed to address and solve its management and programmatic inefficiencies, Chair Snowe wanted to ensure that the SBA had designed a complete plan before moving forward with the next phase. On August 8, 2004, the SBA responded to Chair Snowe's request for additional details on the agency's transformation plans.

B. SBA'S BUYOUT ANNOUNCEMENT REGARDING AGENCY TRANSFORMATION PLANS

On September 9, 2003, the SBA and the AFGE Council 228 signed a memorandum of understanding (MOU) that established and staffed a liquidation center in Herndon, Virginia. This MOU included an agreement that the SBA district office staff who reported performing liquidation functions during 25% or more of their time in the agency's cost allocation survey would be directly reassigned to the liquidation center or to the 6 most severely understaffed district offices: New York, Newark, Atlanta, Chicago, San Francisco, and Los Angeles. Otherwise, the SBA employees identified would have to choose the option of early retirement or a buy-out.

On September 10, 2003, 180 SBA district office employees received letters identifying them as being responsible for liquidation work. Those employees were given 7 calendar days to accept a buy-out option, or choose to stay and be directly reassigned without knowledge of where that assignment would be located. Those employees choosing to accept a buy-out were required to separate from Federal service no later than September 30, 2003. Although the Committee was aware of the SBA's intentions to eventually reposition staff, there was no notification to the Committee of these plans prior to implementation.

As a result of the SBA's decision to offer buyouts and direct reassignments to SBA personnel, on September 15, 2003, Chair Snowe, again sent a letter to Administrator Barreto requesting additional information on the agency's transformation plans. The SBA had determined that a significant portion of its workforce was not well positioned geographically to meet the goals that the current Administration wants to achieve--reaching more small businesses directly. As a result, part of the transformation plan was designed to move personnel to locations in need of staffing. In addition, the agency expected to down-size its workforce and to free up limited salary and expense resources. As indicated in the letter, Chair Snowe's concern regarding the buyouts was that if necessary personnel were removed, many States would face tremendous challenges in providing SBA programs and services where current staffing was already minimal.

C. SBA'S PLANS TO IMPROVE AND TRANSFORM THE 504 AND 7(A) LOAN LIQUIDATION AND PURCHASING ACTIVITIES

On October 30, 2003, Chair Snowe sent a letter to Administrator Barreto supporting the agency's new plan to streamline and modernize the loan liquidation program. According to the SBA's plans, by streamlining the workforce the agency would be able to improve loan processing functions, reduce personnel costs, and improve marketing and outreach. Additionally, the SBA expected to receive an even smaller operating budget for Fiscal Year 2005. Understanding the realities of the appropriation, and realizing that the agency

must find ways to do more with less funding, this new transformation initiative was a step towards accomplishing the SBA's mission to serve more small businesses with limited funding.

The agency's new transformation plan contained three key components to effectively deliver services and assistance to small businesses through better management of the SBA's workforce including: increasing the number of employees in the field offices that directly assist small businesses; reducing the cost of operations not directly related to assisting small business, thereby providing more resources for assisting small businesses; and ensuring that key positions in all the field offices are filled with the most capable and qualified staff.

The final results of the pilot centralization involving three District Offices--Phoenix, Arizona, Charlotte, North Carolina, and Miami, Florida, showed some success.

The centralization of the 504 loan application processing decreased the processing time for these loan applications from more than two weeks to an average of two days. Through this pilot, 631 applications were submitted and nearly 500 were approved. By reducing the processing time for these loan applications, small business owners could move forward with construction of a new facility or purchase necessary machinery quicker. The results of reducing the processing for these loans allows new capital flows into the economy sooner and small businesses are able to create and retain more jobs sooner helping to spur job growth.

Additionally, the centralization of the SBA's 7(a) loan liquidation and guarantee purchase activities showed similar results. The processing time for these activities was reduced to an average of 60 days from a national average of over 500 days. The SBA modeled its approach after commercial banks and lenders and the SBA's lending partners eventually would absorb all of SBA's liquidations functions as the agency continued to streamline these processes.

Based on these results and understanding the SBA's plan as it was presented, Chair Snowe provided her support for the initiative.

VI. SBA'S INTERNATIONAL TRADE PROGRAM: FUNDING CONSTRAINTS FOR U.S. EXPORT ASSISTANCE CENTERS (USEACS)

On September 23, 2003, Chair Snowe sent a letter to SBA Administrator Barreto of the SBA expressing her concern that the agency was in jeopardy of being withdrawn from the U.S. Export Assistance Centers (USEACs). USEAC's are one-stop shops located in major metropolitan areas throughout the United States that promote trade and provide small or medium sized businesses with local export finance assistance. USEACs work, in partnership with the U.S. Department of Commerce and the U.S. Export-Import Bank, is the only partner that offers loans that are geared toward small businesses developing or expanding in the export market.

As a result of the SBA not paying its portion of overhead costs for the USEACs, the SBA faced the possibility of being withdrawn from these centers based on a Memorandum of Understanding (MOU) with the Department of Commerce and the Export-Import Bank. To meet the interagency agreement in Fiscal Year 2002, the SBA absorbed the salaries and the agency's share of operating and facility costs. However, for Fiscal Year 2003 the agency only allocated enough money for salaries with no funds obligated for operating and facility costs. As a result of Chair Snowe bringing the matter to the attention of the Administrator, the SBA responded immediately and fulfilled their obligation under the MOU agreement.

VII. THE SBA BUDGET AND APPROPRIATIONS FOR FISCAL YEAR 2005

A. FISCAL YEAR 2005 VIEW AND ESTIMATES LETTER TO SENATORS NICKLES AND CONRAD

On February 20, 2004, Chair Snowe sent a letter to Budget Committee Chairman Don Nickles and Ranking Minority Member Senator Kent Conrad regarding her views on the President's Fiscal Year 2005 budget request for the SBA. Chair Snowe's letter listed concerns regarding the request for zero appropriations and recommended funding levels for the 7(a) loan guaranty program, microloan program, microloan technical assistance, Federal and State Technology Partnership program, and U.S. Export Assistance Centers. In addition, Chair Snowe requested an increase in appropriations for the Small Business Development Center, SCORE and the office of the National Ombudsman. Overall, Chair Snowe's total request was $121 million over the FY2004 appropriations to provide adequate funding levels for the SBA's key lending and technical assistance programs.

B. AMENDMENT TO S. CON. RES. 95

On March 11, 2004, the Senate agreed to amendment SA 2839 offered by Chair Snowe to increase the budget authority for the SBA in the Senate Budget Resolution for Fiscal Year 2005. By increasing the SBA's budget authority the agency would effectively be able to provide its lending and technical assistance resources to our nation's small businesses. The President's proposed budget for the SBA was 15 percent lower than budget proposed last year and included zero funding for many of the agency's programs including the SBA's 7(a) program, HUBZone program, and U.S. Export Assistance Centers. With the SBA helping to create or retain more than 6.2 million jobs during the last five years, this amendment provided necessary funds that would aid the agency in its efforts to revitalize our nation's economy. The amendment increased the SBA's budget $121 million over Fiscal Year 2004 appropriations and provided the Appropriations Committee with the ability to provide funding for programs such as the 7(a) loan guaranty program, the Microloan program and Small Business Development Centers.

C. FISCAL YEAR 2005 APPROPRIATIONS LETTER TO SENATORS GREGG AND HOLLING

On May 10, 2004, Chair Snowe sent a letter to Chairman Judd Gregg and Ranking Member, Senator Ernest Hollings of the Subcommittee of Commerce Justice State and the Judiciary requesting that they utilize the additional funding available in the Fiscal Year 2005 Senate passed budget resolution. The request included funding for the Microloan program, U.S. Export Assistance Centers, Federal and State Technology Partnership Program and the Rural Outreach Program. Additionally, Chair Snowe requested increasing funds for Small Business Development Centers, SCORE and the Office of the National Ombudsman. The letter also requested to continue appropriated funds for the 7(a) program. The SBA requested zero appropriated funds in Fiscal Year 2005 for the program with plans to raise fees on lenders and borrowers and reduce the guarantee rates to substitute for appropriations. With this proposal raising several concerns, Chair Snowe requested that necessary appropriations continue until a solution that would most effectively reduce the programs subsidy rate was constructed so that small business growth would not be hindered.

VIII. SBA REAUTHORIZATION--EXPIRATION OF SBA PROGRAMS

On July 26, 2004, Chair Snowe sent a letter to SBA Administrator Barreto requesting information on SBA's programs that have suffered a full lapse in authority and may be partially restricted or altered because of the continued expiration of SBA programs. In particular the letter addressed the Women's Business Center Program, the 7(a) loan guaranty program, the Preferred Surety Bond Program and the Small Disadvantaged Business Program. The Senate had unanimously passed S. 2700, a bill introduced by Chair Snowe to temporarily extend through September 17, 2004, certain programs under the Small Business Act and the Small Business Investment Act of 1958. However, this bill did not pass the House of Representatives before the Congress recessed and, as a result, small businesses would not receive the valuable assistance provided by many of the SBA's programs until Congress returned in September to reconsider the bill.

IX. PROCUREMENT ISSUES

A. SMALL BUSINESS PROCUREMENT OPPORTUNITIES, TITLE IV OF S. 1375, THE SMALL BUSINESS ADMINISTRATION 50TH ANNIVERSARY REAUTHORIZATION ACT OF 2003

For over half a century, the Small Business Act has been directing the Federal Government to provide a fair portion of prime contracts and subcontracts to small businesses. Therefore, procurement matters have figured prominently in Chair Snowe's efforts to reauthorize the Small Business Administration. Numerous contracting-related provisions were favorably reported by the Committee and unanimously approved by the Senate on September 26, 2003 as part of the earliest SBA reauthorization bill, S. 1375. S. 1375 was never voted on by the House. The descriptions of these provisions contained in Senate Report 108-124 are reprinted below.

S. 1375 Procurement Provisions

Sec. 401: Contract consolidation--Section 401(a) replaces the definition of `bundled' contracts with `consolidation of contract requirements' to mean the use of a solicitation to obtain offers for a single contract or a multiple award contract to satisfy two or more requirements previously provided or performed, or of a type that is capable of being provided or performed by small business for that department or agency under two or more separate contracts smaller in cost than the total cost of the contract for which the offers are solicited.

Section 401(b) amends Section 15(e) of the Small Business Act and complements the intent of the original contract bundling legislation. It sets forth the procedures to be followed by Federal agencies and the SBA with regard to consolidation-of-contract requirements.

This section also limits the authority of Federal agencies to execute an acquisition strategy that includes a consolidation-of-contract requirement with a total value in excess of $2 million ($5 million for the Department of Defense) unless the agency demonstrates that the consolidation is necessary and justified based on market research. In addition, agencies must identify alternative contracting approaches that would involve a lesser degree of consolidation of contract requirements.

When an agency contemplates a consolidated procurement above $5 million ($7 million for the Department of Defense), this section requires the agency to conduct a more extensive review that includes the estimated benefits of the proposed consolidated contract requirements and how such benefits were calculated. Additionally, this section requires an agency to: (1) assess the specific impediments to participation by small business concerns as prime contractors that will result from the consolidation; (2) specify actions designed to maximize small business participation as prime contractors, including provisions that encourage small business teaming; (3) specify actions designed to maximize small business participation as subcontractors (including suppliers) at any tier under the contract or contracts that may be awarded to meet the requirements; and, (4) identify alternative strategies that would reduce or minimize the scope of consolidation and justify the rationale for not choosing the alternatives.

Section 401(c) modifies Section 15(p)(4)(B) of the Small Business Act to require the SBA to collect procurement strategies that have been successful in maximizing small business prime and subcontracting opportunities. It requires the SBA to include in its annual contract bundling report to the Congress a section that identifies and describes these best practices.

Section 401(d) amends Section 15(l) of the Small Business Act to provide for at least one Procurement Center Representative (PCR) in each state. In addition, this section directs the Administration to ensure there is not less than one PCR assigned at each major

procurement center. This subsection also clarifies that these individuals shall be independent of, and have responsibilities independent from those of, SBA Breakout Procurement Center Representatives and Commercial Market Representatives.

Section 401(e) makes technical corrections to Section 15(k) of the Small Business Act, and Section 401(f) makes conforming amendments to Section 15(p) of the Small Business Act.

Section 401(g) requires the GAO to conduct a study by June 30, 2004, of the feasibility of establishing contract consolidation thresholds based on industry categories.

Sec. 402: Agency accountability--Section 402 makes numerous changes that hold agencies accountable for small business utilization goals. Subsection (a) amends Section 15(g)(2) of the Small Business Act to require agency heads to identify, in their strategic plan and their annual budget submission to Congress, a specific portion of their budget requests that will be awarded to small businesses; and, to report on these amounts as part of the Government Performance and Results Act (GPRA) in their Annual Performance and Accountability reports.

Additionally, the head of an agency may also be required to provide a complete report to the agency's congressional appropriators on the agency's small business utilization at the next appropriations cycle.

This section also directs agency senior procurement executives to communicate to subordinate employees the importance of achieving small business goals. In addition, it directs agencies to include in the annual performance evaluation for senior procurement and program office employees, a factor that measures the success of that senior executive in small business utilization.

For agencies that fail to achieve their small business achievement goals, this section would permit, where appropriate, a percentage of the performance bonus for that agency's senior procurement and program office employees to be withheld.

Section 402(b) amends Section 15(k)(3) of the Small Business Act to ensure that all Directors for the Office of Small and Disadvantaged Business Utilization report to the head of the agency.

Section 402(c) amends Section 10(d) of the Small Business Act to require, in addition to the Department of Defense, all Federal agencies represented on the President's Management Council to submit annual small business achievement reports to the Committees and the Committee on Small Business of the House of Representatives showing the amount of funds appropriated that have been expended, obligated, or contracted to be spent with small business.

Sec. 403: Small business participation in prime contracting--Section 403(a) amends Section 15(g) of the Small Business Act to establish a government-wide goal for participation by small businesses of the dollar value of awards placed against multiple award schedule contracts at not less than 23 percent.

Subsection (b) amends Section 15(j) of the Small Business Act to ensure that the small business reserve threshold is adjusted for any increase to the simplified acquisition threshold. This subsection further amends Section 15(j) to include Federal Supply Schedule orders within the small business reserve.

Sec. 404: Small business participation in subcontracting--Section 404(a) makes several changes that hold prime contractors responsible for the validity of subcontracting data. It amends Section 8(d)(6) of the Small Business Act to require the chief executive officer of large prime contractors to certify the accuracy of the firm's subcontracting report under penalty of law. It also requires large prime contractors to certify that they will use small business subcontractors in the amount and quality used in preparing their winning bid or proposal unless such firms no longer are in business or can no longer meet the quality, quantity or delivery date.

Subsection (b) amends Section 16(f) of the Small Business Act to impose penalties for false certifications of past compliance with small business subcontracting.

Sec. 405: Evaluating subcontract participation in awarding contracts--Section 405 amends Section 8(d) of the Small Business Act to provide for the consideration of proposed small business participation as subcontractor and suppliers as part of the process of selecting among competing offerers for any contract award that includes significant opportunity for subcontracting. It also provides for recognition of a prime contractor's past performance in supporting small business subcontracting participation in other Federal contracts.

This section requires the SBA to share subcontracting compliance review data with Federal contracting officers and to update a national centralized government-wide database with prime contractor past performance specifically related to subcontracting plan compliance.

It also requires contracting officers to withhold prime contractor payment until the prime contractor provides the agency with complete and accurate subcontracting reports.

If a subcontracting violation is found to constitute a material breach of contract, this section requires such material breaches to be referred to the Inspector General of the affected agency for investigation.

Sec. 406: Direct payments to subcontractors--Section 406 amends Section 8(d) of the Small Business Act to establish a pilot program in certain agencies to test direct payment to small business subcontractors. This program shall remain in effect until September 30, 2006.

Sec. 407: Women-owned small business industry study--Section 407 amends Section 8(m)(4) to direct the GAO to conduct a study by December 31, 2003, to identify industries in which small businesses owned and controlled by women are underrepresented with respect to Federal procurement.

Sec. 408: HUBZone authorization--Section 408 amends Section 31(d) of the Small Business Act to extend authorization of funding levels for the HUBZone program through Fiscal Year 2006.

Sec. 409: Definition of HUBZone; treatment of certain former military installation lands as HUBZones--The section amends Section 3(p) of the Small Business Act to designate military installations undergoing closure as HUBZones.

Sec. 410: Definition of HUBZone small business concern--Section 410 amends Section 3(p) of the Small Business Act to modify the ownership requirements for HUBZone small businesses to include any small business investment company, specialized small business investment company, New Markets Venture Capital company, or other similar investment company, provided such ownership does not exceed 15 percent of the small business concern.

Sec. 411: Acquisition regulations--Section 411 establishes a deadline for procurement regulations to be issued no later than 180 days after the date of the enactment of this bill.

B. AMENDMENTS TO THE RONALD W. REAGAN NATIONAL DEFENSE AUTHORIZATION ACT FOR FY 2005

The annual DoD Authorization Act traditionally contains a number of provisions affecting access of small business to government contracts as well as integrity of procurement programs. During consideration of H.R. 4200 and its Senate companion, S. 2400, Chair Snowe took a stand for small business by filing a series of amendments to the bill. The Senate unanimously adopted four Snowe amendments:

1. Amendment No. 3399 (Feingold-Snowe)--Amendment No. 3399 required that, as part of pre-separation counseling, veterans receive counseling on procurement opportunities available to veterans and service-disabled veterans. It also permitted the Department of Veterans Affairs (VA) and the Department of Defense (DOD) to allow such counseling on their facilities through the SBA, VA Outreach Centers, Small Business Development Centers, and other government agencies. It also required the General Accounting Office to conduct a new study to determine what improvements in veteran pre-separation counseling, including procurement counseling, will be needed to better serve the nation's veterans.

Although the House-Senate conferees chose not retain the counseling provisions except the GAO study provision, on October 21, 2004 President Bush quickly moved to issue the Service Disabled Veterans Executive Order No. 13360, which implemented the substantive changes to service-disabled veterans procurement counseling sought by Chair Snowe. The Committee will exercise oversight over implementation of this Executive Order by working with Executive Branch agencies and with the GAO.

2. Amendment No. 3273 (Snowe-Coleman-Kerry)--Amendment No. 3273 was meant to better protect the interests of small businesses on the Office of Federal Procurement Policy's (OFPP's) Advisory Panel on Review of Acquisition Law and Policy by requiring the panel to make recommendations on assuring competition and small business participation, and providing for review of its report by both the Senate and the House Small Business Committees. The amendment was meant to apply President Bush's Executive Order 13272 on consideration of small business interests to the formulation of federal procurement policy. In her June 17, 2003 letter to the White House, Chair Snowe asked the OFPP to implement the substantive policies of the Amendment.

On July 12, 2003, Acting OFPP Administrator Robert Burton wrote to the Committee to announce the Administration's intent to implement the policies of the Amendment by placing a senior-level SBA official on the panel and requiring the panel to consider small business prime and subcontracting issues. Despite such support from the Bush Administration, the House-Senate conferees chose not to include this Amendment into the final bill. Nevertheless, the Committee is pleased with the commitment of the Bush Administration concerning the panel.

3. Amendment No. 3246 (Snowe)--Amendment No. 3246 expanded the DOD's Mentor-Protege Program to include service-disabled and HUBZone small business concerns in order to boost contract participation by these groups as DOD suppliers and subcontractors. The National Defense Authorization Act for FY 1991 established the pilot Mentor-Protege Program to provide reimbursements and other incentives for major DOD contractors to furnish disadvantaged small businesses assistance to enhance their capabilities and increase their participation as subcontractors and suppliers on DOD contracts. Four years ago, Chair Snowe worked closely with Chairman Warner to extend the benefits of this successful program to women-owned small businesses. This Amendment was retained in the final version of the Act and signed into law.

4. Amendment No. 3434 (McConell-Snowe)--Amendment No. 3434 set forth the sense of the Senate to protect, in any future adjustments for inflation, the dollar value of contract awards required to be reserved for small businesses to include those valued from $2,500 to $100,000. Existing law allows procurement officials to forego full and open competition on many contracts worth less than the simplified acquisition threshold of $100,000. This amendment, which was introduced by Senator Mitch McConnell (R-KY) at the behest of Chair Snowe, also directs the Administrator of Federal Procurement Policy to ensure that appropriate government-wide policies and procedures are in place to monitor data on purchases made by federal agencies using government purchase cards and to encourage the maximum practicable number of those purchases be made from small businesses. Small Business Act provisions set a government-wide statutory goal of

23 percent of all prime contract awards to be awarded to small businesses. The government purchase card program has been around since 1989, when it was created as a way for agencies to streamline purchases of low-cost goods and services. Initially about 10,000 employees were issued cards. In the first year, they made only 2,000 transactions. In Fiscal Year 2002, they accounted for more than $15.2 billion in government expenditures and 25 million transactions. 1

[Footnote] The sense of the Senate provision was not retained in the final version of H.R. 4200.

[Footnote 1: Fiscal Year 2002 Federal Procurement Report, Federal Procurement System, General Services Administration, p. 13.]

The GAO recently reported (at the Committee's request) difficulties, with the collection of demographic data and has recommended specific action to improve data collection. GSA states they are making advances in collecting data on purchase card expenditures with small businesses, including minority and women-owned firms, but additional improvements are needed. The parity provision was retained in the final version of the bill and signed into law.

5. Amendment No. 3344 (Byrd-Snowe-Allen-Coleman-Kerry)--Amendment No. 3344 intended to expand the Commission on the Future of National Technology and Industrial Base by adding small business concerns for participation in and consideration by the Commission and to require that it study shortages of critical technologies and raw materials. The Senate unanimously approved this provision, although the Conference Committee chose not to create the Commission.

C. PROCUREMENT PROVISIONS IN S. 2821, THE SMALL BUSINESS REAUTHORIZATION AND MANUFACTURING ASSISTANCE ACT OF 2004

Chair Snowe continued her efforts to address important procurement matters as part of the second SBA reauthorization bill, S. 2821. That legislation contained 2 contracting provisions: Section 502, Procurement Center Representatives, which duplicated Section 401(d) of S. 1375, and Section 501, Women-owned Small Business Concerns. Section 501 directs the Administrator to conduct a study, within 90 days of enactment of this legislation, to identify industries in which small businesses owned and controlled by women are underrepresented with respect to Federal procurement; and conveys special authorities to the Administrator in carrying out the Small Business Act. This provision was originally in H.R. 2802 and was reported out of the House Small Business Committee, but left pending in the House.

Chair Snowe, along with Senator Bond and Senator Allen, also sponsored an amendment concerning the HUBZone and the Section 8(a) programs. The amendment was later incorporated into the third and final SBA reauthorization bill which passed as a part of the Consolidated Appropriations Act for FY2005.

D. HUBZONE AND SECTION 8(A) IMPROVEMENTS IN THE SMALL BUSINESS REAUTHORIZATION AND MANUFACTURING ASSISTANCE ACT OF 2004

The HUBZone Program continues to provide a valuable opportunity to reach out to small business owners who have not participated in government contracting in the past. The success of the program, however, will depend on addressing several unforseen issues that have arisen in the past year, as well as taking steps to strengthen the program's focus.

New questions about eligibility and program implementation have arisen. In response, Chair Snowe, Senator Allen, Senator Bond, Senator Murkowski, Senator Gregg, and Senator Talent crafted legislation to reform the HUBZone program that was included into the Small Business Reauthorization and Manufacturing Act, Public Law No. 108-447. An excerpt from the Explanatory Statement filed By Chair Snowe in the Congressional Record on November 19, 2004 concerning these, is reprinted below.

Streamlining And Revision Of Hubzone Eligibility Requirements--The Historically Underutilized Business Zone (HUBZone) program was designed to direct portions of federal contracting dollars into areas of the country that in the past have been out of the economic mainstream. HUBZone areas, which include qualified census tracts, poor rural counties, and Indian reservations, often are out-of-the-way places that the stream of commerce passes by, and thus tend to be in low or moderate income areas also characterized by comparatively high unemployment. These areas can also include certain rural communities and tend generally to be low-traffic areas that do not have a reliable customer base to support business development. As a result, businesses have been reluctant to move into these areas and expend the necessary funds to develop the infrastructure for creation of jobs.

The HUBZone program seeks to overcome these problems by providing the means for Federal procurement activities to become customers for small businesses that locate in HUBZones. In past years, the HUBZone program has encountered issues relating to the statutory requirement that a HUBZone firm be entirely owned and controlled by individual U.S. citizens. This requirement means that all HUBZone applicants need to be owned by human beings directly and not human beings organized as business entities. However, many small business owners and small business investors prefer to take advantage of various corporate forms in order to limit the personal liability for themselves and their families. Exceptions for Alaska Native Corporations, Indian tribal governments, and community development corporations were added by the Small Business Act reauthorization legislation in 2000. Even with those changes, the presence of a corporate entity or a limited liability company with an ownership stake in a small business would have automatically disqualified an otherwise eligible firm from participation in the HUBZone program. Small agricultural cooperatives, which already maintain presence in rural HUBZones, would have faced similar restrictions. These rules unnecessarily impede the flow of capital to the very areas that need it the most and create compliance conflicts with other small business procurement programs.

Section 151 addresses this problem through streamlining and revision of the eligibility requirements for HUBZone small businesses to include small businesses that are 51 percent owned by United States citizens, as well as to include small businesses which are small agricultural cooperatives or are owned and controlled by small agricultural cooperatives.

In addition, HUBZone firms owned by the Indian tribes have been facing peculiar challenges due to statutory requirements that they must hire a certain percentage of its workforce performing a federal contract or subcontract from Indian reservations or adjacent areas. These requirements, while motivated by the desire to spur economic development of the tribes, over time had the unintended consequence of putting tribally-owned firms at a disadvantage in comparison with all other HUBZone concerns by imposing a geographic restriction on the kinds of contracts that tribally-owned HUBZone firms could perform. Geographic restrictions also impeded business synergies between tribally-owned HUBZone firms and Alaskan Native Corporations. To remedy this disparity, the Act is providing tribally-owned HUBZone concerns the option of qualifying for the program based on locating in, and hiring workers from, either Indian reservations or any other HUBZones on the same terms as available to other HUBZone firms. Congress notes that the Indian tribes, as owners of the HUBZone firms, will be receiving expanded economic benefits from new contracting opportunities.

Expansion Of Qualified Areas--Congress observes that the HUBZone area qualifications are also in need of improvement. Paradoxically, economically distressed rural communities in states with high unemployment--among the neediest of needy areas--currently do not qualify for the HUBZone program because rural areas currently must qualify in relation to the statewide unemployment average. As an example, in calendar year 2003, Alaska had a statewide unemployment rate of 8.0 percent. To qualify as a HUBZone area, it was necessary for an Alaskan rural community to have an 11.2 percent unemployment rate. But, in 25 of the 50 states, a rural community could have qualified as a HUBZone with an unemployment range of 7.8 percent or less.

Section 152 addresses this problem by modifying the definition of a `qualified non-metropolitan county' to provide the option of comparing the unemployment statistic for that area to the statewide average or to the national average. The new statutory HUBZone definition should give the Small Business Administration flexibility to address both national and state-wide unemployment disparities without hurting the states that have comparatively low unemployment overall, but with pockets of serious unemployment.

Congress recognizes the drastic economic ramifications of military base closures and that the HUBZone program can uniquely harness the strength and the creativity of the private sector by providing incentive for small businesses to relocate to areas suffering such ramifications. According to congressional research, more than 300 military bases closed or realigned between 1988 and 2003 and more than 50 percent of these bases were located outside of a designated HUBZone. Therefore, Congress intends that, upon the later of the enactment of this act or the date of final closure, existing as well as future military base closure areas be designated as HUBZones for a period of five years in order to reinvigorate the productive capacity of such areas and leverage existing local customers and a skilled workforce. Congress believes that new businesses and new jobs created through the HUBZone small firms mean new life for areas affected by base closure.

Additionally, Congress notes the existence of numerous complaints that the current definition of HUBZone qualified areas based on census income data, in conjunction with the definition of HUBZone qualified redesignated areas, fail to provide adequate time to recoup a return on investment. These concerns appear justified. Congress observes that the HUBZone program is relatively young, and the federal government is not even close to meeting its statutory prime contracting goal of 3 percent. Because the HUBZone program was enacted into law in 1997, the initial HUBZone areas were designated on the basis of the 1990 Census. However, the federal government conducted another census in 2000. As a result, many areas were redesignated after only 3 years of the program's existence. The statute currently grandfathers the redesignated areas into the program for 3 years.

Congress notes that, at the time of the last redesignation, the small business community received comparatively few benefits from the HUBZone program despite the substantial workforce recruitment, compliance, and business development efforts that must be expended by each of the HUBZone firms. These small businesses, which made business decisions to pursue the HUBZone strategy by locating in a HUBZone, adjusting their ownership structure, and recruiting HUBZone residents are in danger of being penalized for the federal government's slow initial implementation of the HUBZone program. Further, anecdotal evidence indicates that it may take a long time for a new firm to secure a federal contract, and that multiple-order contracts commonly envision task orders over a number of years. In these circumstances, a 3-year grandfather clause would appear not to provide sufficient time for a small business to generate a return on the HUBZone investment. By comparison, companies under the 8(a) program can maintain such a designation for 9 years, and a general small business designation can be maintained indefinitely. Therefore, Congress imposes a moratorium on HUBZone area redesignations by providing for an extension of the redesignation period until the conclusion of the 2010 Census. No certified HUBZone firm shall be decertified as a result of either the redesignation process based on the 2000 Census data or any revised unemployment data subsequent to December 21, 2000, the date of passage of enactment of the HUBZone in the Native America Act. It is the intent of Congress to have the Small Business Administration reinstate any HUBZone firm previously decertified based on these two criteria.

Congress also finds that, concurrently with the moratorium, a study on the effectiveness of the HUBZone area definitions, including the redesignation period, must be conducted by the Office of Advocacy of the United States Small Business Administration. The Office of Advocacy is chosen to conduct this study for its particular expertise in small business procurement, rural small business development, and general small business matters. Congress directs the Office of Advocacy to examine the impact and

effectiveness of the HUBZone definitions on small business development and jobs creation, and expects that the Office of Advocacy will periodically consult with congressional small business committees on matters concerning this study. Findings and recommendations of the study must be reported to congressional small business committees by May 1, 2008.

Price Evaluation Preference--With regards to the application of existing HUBZone price preferences to international food aid procurements conducted by the United States Department of Agriculture (USDA), Congress concludes that the preferences as they currently stand are hindering the goals of U.S. foreign humanitarian food assistance programs. This view is supported by extensive consideration of market data from the Kansas City auction office of the USDA Farm Service Agency, the structure of auction tenders and other auction processes, as well as data supplied by the industry. It appears that there is a risk of various unintended and undesirable consequences to applying the current HUBZone mandate to international food aid acquisitions. In particular, it appears that, in the context of food aid tender auctions, the claimed job gains fostered by the current price preference are offset by job losses in other communities, the non-HUBZone small businesses attempting to compete may experience undue harm, and the competitive supplier base may atrophy. In turn, this may undermine USDA's capacity to secure adequate foodstuffs for malnourished persons and increase the costs to the food aid programs without realizing adequate jobs creation and business development benefits.

The HUBZone price preference alternative adopted in this act (a 5 percent price evaluation preference on 20 percent of the contract) would alleviate these potentially damaging effects on the U.S. food aid system. Congress believes that this approach would preserve the HUBZone program's goal of providing HUBZone-eligible companies with a meaningful opportunity to compete while ensuring that the USDA has an adequate capacity of supply from which to draw to deliver emergency food aid in catastrophic situations. This approach would also eliminate the current HUBZone program's application problem which directly penalizes non-HUBZone small businesses due to the nature of the food aid auctions. The potential for job losses in other communities would be limited. Importantly, this approach also reflects the cornerstone of America's efforts to provide food assistance to the world's neediest people through competitive markets.

According to President Dwight D. Eisenhower and Congressional architects of the Small Business Act, an overarching purpose of small business procurement programs is to assure a vibrant, competitive supplier base for the Federal Government. Price preferences are employed to further this purpose, and should be structured accordingly. Congress notes that, in general, price preferences have been a valuable tool for encouraging a more robust supplier base. Nevertheless, Congress believes that, in these very special circumstances, it is important to encourage competition by keeping multiple vendors actively bidding in our food assistance programs to secure the lowest cost procurement and emergency supply chains in the case of humanitarian crisis. This approach builds on the current small business 10 percent set-aside by an additional 20 percent allocation of every tender to small businesses and HUBZone applicants. It guarantees full and open competition, including competition pursuant to the Small Business Act, in food aid procurement tenders to assure that U.S. food aid programs do not suffer consequences inconsistent with the intent of the price preference program. The approach in this legislation safeguards the dual interests of a vibrant small business presence in federal procurements and robust food aid programs.

HUBZone Authorizations--Congress notes that the Federal Government has failed to meet its statutory HUBZone contracting goals every single year these goals have been in effect. Continuous, dedicated authorization of the HUBZone program is essential to continue the effort to bring economic opportunities to the HUBZone areas. Therefore, Congress extends the current authorization of appropriations of $10,000,000 for the SBA's HUBZone program through Fiscal Year 2006.

Participation In Federally Funded Projects--Section 155 removes the burdensome paperwork requirements for additional certification by firms seeking to perform any State, or political subdivision projects that utilize federal dollars if they are currently certified, or otherwise meet the applicable qualification requirements, for participation in any program under 8(a) of the Small Business Act.

This change will: (1) provide federally certified 8(a) small businesses with access to all State and local projects funded in whole or in part by the Federal Government; (2) eliminate the burden of requiring 8(a) small businesses to get certifications from the State or local government or both in addition to their federal certification under 8(a); and, (3) decrease certification costs and eliminate time delays associated with the burden of receiving additional State or local government certifications for businesses authorized to participate in program established by Sec. 8(a) of the Small Business Act.

E. SBIR LEGISLATION TO FACILITATE THE INTENT OF CONGRESS FOR THE SMALL BUSINESS INNOVATION RESEARCH PROGRAM

In establishing the Small Business Innovation Research Program, Congress sought to encourage government agencies to use their research and development money to provide development funding for innovative research by small businesses where there is a strong potential for commercializing the research results and creating appropriate production capacity. A key indicator of commercial potential is availability of non-governmental funding.

Recently, administrative law judges at the SBA Office of Hearings and Appeals issued a series of decisions which, for the first time in over 20 years, excluded majority venture-backed firms which were otherwise small from participation in the SBIR Program. It appears that the OHA opinions do not represent the final decision of the SBA, as they may be overruled by the Administrator. Nontheless, these decisions had serious adverse implications for many companies, especially those in the biotechnological field, and for agency programs that encourage commercialization, like the DOD's Phase II Plus. At stake is the continuous inflow of investment capital for small companies that develop

life-saving drugs and products critical to national defense and to the advancement of innovation.

Chair Snowe and two other members of this Committee, Senator Bond and Senator Bennett, along with Senator Kennedy, introduced a bill, S. 2834, designed to restore the status quo prior to the OHA decision. Following in-depth discussions with industry and among member staffs, the Committee is considering a substitute bill as well as activities to study this issue further. Committee staff has been in discussions with the National Academy of Sciences, which has been directed by law to study the SBIR Program, concerning possible workshops or other study activities on this issue.

F. INVESTIGATION OF THE SBA'S CONTRACTING PRACTICES

As part of the Committee's oversight role, Chair Snowe has been working with the Inspector General of the SBA to review the integrity of the SBA's own procurement processes and reduce their vulnerability to waste, fraud, and abuse. The Committee will continue this work in the 109th Congress in order to ensure that the SBA leads other acquisition agencies by example.

G. CONTRACT BUNDLING

Last March, a hearing of the Small Business Committee was called to learn more about the President's plan to unbundle contracts for small business. During the hearing Administration officials assured the Chair that appropriate metrics would be put in place to track progress in implementing the plan. Since that time, however, the Committee learned that several agencies were not complying with certain requirements of the plan.

Chair Snowe sent letters to the OMB's Office of Federal Procurement Policy to request information on the metrics they have put in place to monitor agency progress. In addition, letters were sent to each of the agency's on the President's Management Council to request their progress in addressing contract bundling concerns.

1. Oversight of Contract Bundling Practices in Acquisition of Translation and Interpretation Services for the War on Terrorism--As Chairs of the Senate Committee on Small Business and the Senate Committee on Governmental Affairs, Senator Snowe and Senator Collins have taken a keen interest in the acquisition planning of the Army Intelligence and Security Command (INSCOM) for reprocurement of translation services. Existing contract, originally awarded to BTG, Inc. for 75 translators, was novated to Titan Corporation as a result of a merger and acquisition of the awardee and ballooned to over 4,000 contractor personnel. Traditionally, small boutique firms full of experts in particular languages, translation techniques, and substantive subject matter vocabularies have been the backbone of the translation services industry. Titan did not specialize in translation services at the time of its merger with BTG. Media reports suggested that Titan was forced to rely on hiring taxicab drivers and random local individuals off the street in order to accommodate the growing demands of the military in the war on terror. The Committees received information suggesting that the apparent result of such practices has been loss in professionalism, and Titan translation staff recently made the news due to alleged involvement into the Abu Ghraib prison abuse scandal.

The Central Contractor Registry lists over 1,000 small and HUBZone small businesses which offer translation services to the government, including companies such as World Wide Language Resources of Maine. INSCOM's original strategy would have excluded these companies from prime contracts by creating a mega-contract for worldwide translation services in all languages and translation assignment management for the military and civilian agencies.

Chair Snowe and Senator Collins have written Michael Wynne, the Acting Under Secretary of Defense for Acquisiton, Technology, and Logistics and asked him to take all necessary actions to unbundle this procurement and to prevent wholesale delegation of inherently governmental functions to Titan. The SBA also opined that INSCOM's approach implicated bundling concerns. In the name of administrative convenience, the Army's choice to exclude small businesses from translation prime contracts would have discarded a large, qualified supplier base precisely at the time when our military forces are in need of quality, responsible translation providers. Chair Snowe was pleased that the Army withdrew its solicitation.

Acting Under Secretary Wynne, who is also the nominee for that post, has written Chair Snowe with assurances of INSCOM's plans to comply with bundling regulations. As part of the Senate's advice and consent responsibilities, Committee staff will continue to provide oversight on this important issue by seeking further clarifications and commitments for implementation of Congressional and Presidential contract bundling initiatives from the Acting Under Secretary.

2. Oversight of Contract Bundling in Commercial Satellite Telecommunications Services for the Military--In the Ronald W. Reagan National Defense Authorization Act, Congress directed the Secretary of Defense to conduct a study of commercial satellite telecommunications acquisitions by the DOD. These services were originally procured through a large-business contract known as MTC. However, subsequently the DOD implemented a small business IDIQ contract structure known as DSTS-G. Under DSTS-G, small businesses act as value-added resellers, making large providers to compete for each task order. It was the largest DOD small business procurement in history at the time of the award, and provided a strong demonstration of the ability of small businesses to be a strong presence in the high-technology fields.

Chair Snowe has written a letter reminding the DOD that analysis of contract bundling and consolidation must be conducted prior to any changes in the existing DSTS-G procurement strategy. Chair Snowe also requested the Administrator of the SBA to appeal any decision to bundle this cont