costs do not include the additional capital investments needed as result of regulation. Agencies argue that using a broader definition (i.e., the definition required by law) will hide the costs to micro-businesses because costs will be averaged. However, effective analyses will include the cost estimates for businesses of different sizes in order to identify the sectors with the most need for regulatory alternatives.

Using an inappropriate size definition creates two main problems. First, the use of micro-business sizes results in underestimates of the overall costs of this rule to small businesses. In addition, it completely leaves many small businesses out of the analysis. In this case, the alternative definitions used encompass a large portion of some industry sectors affected by this rule. Therefore, the use of an alternative size is less significant in some sectors (e.g., furniture strippers).

Second, and more importantly, OSHA is required to develop significant alternatives to the proposed rule to minimize the impact on small firms. By using a different size definition, the full impact and the need for alternatives were understated. In fact, the feasibility of implementing this rule for the small manufacturing, construction and industrial paint stripping industries is in question. By using the correct definition, OSHA should have recognized that the feasibility hurdle cuts across all small business sectors and the need for alternatives (besides phase-ins) are critical in some industries.

NEW ADMINISTRATOR'S GOALS

Question. Ms. Alvarez, you have an impressive background in finance and managing government financial institutions. Obviously, the budget before us today was put together largely before you joined SBA.

Could you tell us what your goals are for the agency? Are there specific programs that you intend to emphasize to change?

Answer. My vision for the SBA at this early point in my tenure has eight components. Five of these components embrace our traditional missions and three of these components represent new expanded roles.

First, the SBA must continue to provide access to credit for small businesses, in general, and for small businesses who are underserved by traditional lenders, specifically. My own view is that, especially in these times of severely constrained budgets, we need to do more to figure out exactly who is underserved by private, unsubsidized credit markets and then ascertain what are the best products and distribution systems to use to reach these populations. We already know that we need to redouble our efforts to increase lending to those populations-especially women business owners and minority-owned businesses and those places-distressed urban neighborhoods and remote rural areas-which are underserved now. Providing access to credit is my number one priority.

I am also committed to exploring ways in which the SBA can increase private, unsubsidized lending to small businesses and lower its cost. For example, I have already begun to collect information on the securitization of small business loans. I believe that small business lending could expand, if we can develop standardization and other approaches that will allow for increased securitization of small business loans.

Second, I have embraced our mission to create and support entrepreneurs through our business education, counseling and development programs. The SBA support for the entrepreneurial spirit through programs like the SBDC's, the Women's Business Centers, the Business Information Centers, and the SCORE volunteers, are fundamental to our core mission. I am challenging the managers of these programs to open the doors wider to everyone in this society.

Third, I am very impressed with the role that the SBA plays in helping communities recover from disasters. We are the Disaster Bank, providing the downpayment on people's futures. I have seen the SBA at work helping the recovery. Our employees are doing so much right now for the people of North Dakota and Minnesota. Our hearts go out to our own SBA employees who have lost their homes. The fourth part of our traditional mission that I have made my own is to help develop procurement opportunities for small businesses especially small disadvantaged businesses. I am encouraged by the efforts to develop new avenues for procurement through technology and by efforts to reduce processing time by delegating 8(a) authorities to the procuring agencies. In my short tenure here, we have approved a new model for 8(a) that allow firms owned by community-based nonprofits to qualify. This approach, recently approved for a community development corporation in Washington, D.C., will allow firms in distressed communities to have an opportunity to compete for federal procurement dollars. And, with the CDC's involvement, we have the hope that the benefits from the procurement dollars will accrue to the residents of the surrounding community. In the area of overall federal pro

curement, our challenge is to increase the number and amount of prime contracts that flow to small businesses and to increase small business access to subcontracts. The government is falling short of a statutory goal of providing 5 percent of all federal procurement to small women-owned firms. Actual performance is at less than 2 percent. I am particularly interested in taking action to increase the federal government's performance with respect to the women's goal. It is not acceptable that the government does not meet this goal.

Fifth, I must be the spokesperson for small businesses in general. As a member of the President's Cabinet, I have the opportunity to bring small business issues to the highest levels of decision making in the federal government. It is my commitment to make sure that the voice of small business is heard.

On top of these five core missions, I would add the following:

One: I want to transform the SBA into a 21st century leading edge financial institution. A leading edge financial institution is one that relies heavily on technology to manage its lending and portfolio management activities. It employs fairly sophisticated techniques to identify and manage risk. The 21st century leading edge financial agency is a cost-effective and efficient organization that delivers credit to small businesses in a very short period of time. It is an organization that analyzes and develops new innovative credit products that serve to meet the various needs of its small business customers. And, it is an agency that operates in a safe and sound manner to protect the interests of the taxpayer.

Two: the SBA will take a leading role in the President's Welfare to Work initiative. President Clinton has promised the American people that he will end welfare as we know it. Last year, the President and the Congress passed landmark legislation that is the first step toward fulfilling the President's promise to the American people. The next step is to ensure that people are moved successfully from welfare to work. The SBA must take a leading role in this initiative because we represent the work side of the welfare to work equation. Small businesses create 75 percent of the new jobs in the economy. We must work to find ways to link employees coming off the welfare rolls with our small business employers. This will be a mammoth organizing task.

Finally, we have a challenge to help small businesses cope with and benefit from changes in the larger economy. The internationalization of capital markets, the rapid pace of change in technology and communications, the reconfiguration of major sectors of the economy such as utilities and financial services all pose risks for the small business sector.

Yet, if these changes are understood correctly and foreseen, nimble small businesses can take advantage of new markets and new opportunities. We have a mandate to help guide small businesses through these changes. Through a series of conferences over the next several years, I want to identify the most important of these macroeconomic trends for small businesses and organize conferences that will allow us to share knowledge on these important changes in the economy.

DISASTER LOAN PROGRAM

Question. As I understand it, your budget does not request additional credit appropriations for the SBA Disaster Loan Program because as of February 1, 1997, you had $325 million in obligational authority which should subsidize $1.6 billion in disaster loans. Is that correct?

Answer. The total amount of funds available for fiscal year 1997 was $326 million which provides for $1.6 billion in obligational authority. As of February 1, 1997 we had used $63 million to make $311 million in loans, leaving $263 million to cover remaining fiscal year 1997 loan needs, administrative expenses and carryover funds to fiscal year 1998.

Question. What are the latest estimates for the flooding in California and the Ohio Valley, and the tornadoes in Arkansas and the Southeast?

Answer. Based on our current level of activity in the areas that you mentioned along with the recent flooding in the upper Midwest we estimate that total disaster loan demand for fiscal year 1997 will be about $1.1 billion.

Question. Are you still confident that you will make it through fiscal year 1998 without new appropriations?

Answer. The fiscal year 1998 budget is based on a substantial carryover from fiscal year 1997, now estimated at $88.4 million, plus $35 million in recoveries. This amount would still provide approximately $1.1 billion in loan authority if Congress adopts the proposal to increase the interest rates on disaster loans. If Congress rejects the proposal to increase interest rates, available loan authority for fiscal year 1998 would be $526 million ($259 million below the ten year average).

Question. However, administrative expenses appropriations for the Disaster Loan Program are requested to increase from $108.5 million this year to $173.2 million. Why?

Answer. The fiscal year 1997 appropriation of $108.5 million included $22 million from the emergency supplemental for disaster loan making, $50.4 million to be transferred to regular salaries and expenses to cover indirect costs of the SBA, $0.5 million to be transferred to the Office of Inspector General for disaster-related activities, $22 million for disaster loan servicing activities, and the balance of $13.6 million for additional disaster loan making activities. Therefore, the disaster loan making operation received $35.6 million in direct fiscal year 1997 appropriations. This was supplemented by $18.2 million carried forward from fiscal year 1996, plus $50 million proposed to be reprogrammed from prior year loan recoveries in the disaster loan program account. The total amount available for the disaster loan making activities was, therefore, proposed to be $103.8 million for fiscal year 1997. To date, only $38.7 million has been approved for reprogramming from the disaster loan program account by the Congress, providing the disaster loan making activity $92.5 million for fiscal year 1997.

For fiscal year 1998, there are no estimated carry forward funds available from fiscal year 1997, and there is no proposed reprogramming from the disaster loan program account. Therefore, funding for the disaster loan making activity is requested as a direct appropriation. This requested level is $98.3 million. The requested level for disaster loan servicing activities is $24.9 million. The requested level to be transferred to the regular salaries and expenses account to support the indirect activities is $50 million. Therefore, the total fiscal year 1998 appropriation requirement is $173.2 million.

Question. This year's budget proposes to increase the interest rates charged on SBA disaster loans from 4 percent to the cost to the Treasury borrowing rate plus one point. Could you explain the proposal and why Congress should agree?

Answer. First, the fiscal year 1998 proposal does not add one point to the cost of Treasury borrowing. Under current law the interest rates fluctuate according to statutory formulas; a lower rate, not to exceed four percent, is available to applicants without credit elsewhere; a higher rate, not to exceed eight percent, is charged to borrowers who have credit elsewhere. To reduce the subsidy cost of the disaster loan program, the budget proposes to increase the interest rate to borrowers without credit elsewhere to the cost of U.S. Treasury for securities of comparable maturity. For borrowers with access to credit elsewhere, the interest rate would be pegged above the Treasury rate. This change would reduce the subsidy in the program from 23.46 percent to 11.44 percent, enabling more loans to be made with the same amount of budget authority. An increase in the interest rate would also remove a disincentive for potential disaster victims to purchase insurance, which is the most desirable method of protection against the financial costs of physical disasters. Removing the caps and raising the interest rates to the cost of money to the government would encourage more reliance on insurance.

MBDA/SBA MINORITY ASSISTANCE

Question. For several years this Committee has been trying to eliminate duplication and get SBA and the Minority Business Development Agency in Commerce to work closer together. In fiscal year 1997 we fenced appropriations in both agencies for this purpose. Could you give us a status report on where efforts stand between the two agencies?

Answer. The report language for the fiscal year 1997 Omnibus Appropriations Act earmarked $2 million in MBDA funding and $1 million in SBA funding for projects jointly developed, implemented, and administered in conjunction between the two agencies. MBDA and SBA jointly developed a proposal that was submitted to the House and Senate Appropriations Subcommittees on Commerce, Justice and State in November 1996. The proposal would utilize the resources of both MBDA and SBA to provide business development assistance to three different categories of small disadvantaged businesses and medium sized businesses traditionally served by these two agencies.

The proposed project has been designed to bring to bear the resources, resource partners and programs of both agencies, without duplication of effort, for the benefit of (1) current eligible Section 8(a) Program participants in the developmental phase, (2) traditional MBDA clients and 8(a) participants about to transition out of the program, and (3) former 8(a) participants and other minority-owned businesses that are no longer small under SBA's size standards and regulations, but still benefit substantially from the transitional business development assistance programs of MBDA

for which they remain eligible. To date, we have not been given a response from Congress on the proposal.

SMALL BUSINESS DEVELOPMENT CENTERS

Question. Your budget proposes to reduce appropriations for Small Business Development Centers from $73.5 million to $57.5 million. Could you explain your proposal? Why is the Defense Transition Program zeroed out in the budget?

Answer. The SBA is attempting to increase the reliance of the SBDC program on the private sector and make the program more effective and self-sufficient by passing a portion of the costs of the program on to the clients. SBDC's charge fees for training (in 1996 SBDC's offset about $4.8 million in training costs through fees) and its own clients value the program at about $686 million. The Agency feels that those who use SBDC services should share some of the costs.

The Defense Economic Transition Initiative, which was initially funded in fiscal year 1995 for $3.375 million and continued in fiscal year 1996 for $2 million, has always been a Congressional initiative. Based on the limited resources of SBA, we believe the SBDC program could generate greater economic impact if it remains dedicated to its core responsibility of business management training and counseling. We have therefore not sought additional funding for this initiative.

SBA FIELD STRUCTURE

Question. For years, this Subcommittee has urged SBA to reduce and rationalize its field structure. In 1995, your predecessor, Phil Lader, proposed some changes but he was stopped by the House side. Have you taken a look at this issue? Have you assessed SBA's field structure?

Answer. The SBA is continuously looking at its field structure and how it fits with the Agency's mission. Over the last 22 years, the district offices have been reduced in FTE's by 17 percent. Although the loan processing and servicing responsibilities are moving away from the district offices, lender oversight and training responsibilities are increasing. In addition, training and technical assistance required for small

business constituents continue to increase.

LOAN GUARANTEE VOLUME

Question. It seems to me that SBA runs the 7(a) program like an entitlement. If there is demand for loans then the assumption is that the Government has to meet that demand. Do you agree? How do we know that Government funding is necessary? I mean, what incentive does any bank have to use its own funds when it knows that the Government will underwrite 80 percent of the risk?

Answer. SBA believes that it is appropriate to allow reasonable program growth within necessary budget constraints, and has requested a slight increase in 7(a) funding for fiscal year 1998 to reflect this growth. SBA has not, however, requested authority to broaden the category of small businesses for which it may guarantee loans. Therefore, for the past several years actual 7(a) loan approvals have remained relatively the same. The last time that SBA asked for supplemental appropriations to support the 7(a) program was during fiscal year 1993. When SBA ran short of appropriated funds again in fiscal year 1995, SBA imposed two measures, reducing gross loan size and eliminating refinancing, to dampen demand.

SBA is well aware that budget constraints make it necessary for every Federal agency to examine its programs to determine whether they represent an appropriate use of taxpayer dollars. You may be interested to know that no lender may ask for an SBA guaranty on a loan until it certifies that it could not make the loan under the same terms and conditions without the guaranty. Based on these certifications, and our feedback from small businesses in need of capital, we believe that the loans that SBA guarantees are important to the Nation's economy, and are not available in the commercial marketplace. SBA's guaranty allows lenders to extend credit when it could not normally do so by allowing longer maturities, less restrictive collateral requirements and loans larger than allowed under some lenders' practices. By selling the guaranteed portions of their loans on the secondary market, SBA's lending partners are also able to leverage their resources to have additional funds to lend to small businesses.

SUBCOMMITTEE RECESS

Senator GREGG. The subcommittee is recessed.

[Whereupon, at 2:21 p.m., Tuesday, March 11, the subcommittee was recessed, to reconvene at 10 a.m., Wednesday, March 12.]

DEPARTMENTS OF COMMERCE, JUSTICE, AND STATE, THE JUDICIARY, AND RELATED FOR FISCAL

AGENCIES

YEAR 1998

APPROPRIATIONS

WEDNESDAY, MARCH 12, 1997

U.S. SENATE,

SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS,
Washington, DC.

The subcommittee met at 9:57 a.m., in room SD-138, Dirksen Senate Office Building, Hon. Judd Gregg (chairman) presiding. Present: Senators Gregg, Domenici, Hutchison, Hollings, Inouye, and Mikulski.

DEPARTMENT OF JUSTICE

OFFICE OF THE ATTORNEY GENERAL

STATEMENT OF JANET RENO, ATTORNEY GENERAL

ACCOMPANIED BY:

STEPHEN R. COLGATE, ASSISTANT ATTORNEY GENERAL FOR ADMINISTRATION

MICHAEL J. ROPER, DEPUTY ASSISTANT ATTORNEY GENERAL, CONTROLLER

ADRIAN A. CURTIS, DIRECTOR, BUDGET STAFF

OPENING REMARKS

Senator GREGG. I appreciate the Attorney General arriving early and the Senator from Hawaii is always early. We are very lucky to have such promptness, so we will start a few minutes early ourselves. I know the ranking member is going to be joining us in a few minutes. I know the Attorney General's time is in great demand and we appreciate her taking time out of her schedule to come and testify relative to her budget and other issues. We welcome you to the committee. It is always a pleasure to have your input and thoughts and ideas, and so I will open the floor to you. Let me first yield to the Senator from Hawaii to see if he has an opening statement.

Senator INOUYE. No, Mr. Chairman.

Senator GREGG. I open the floor to the Attorney General.

ATTORNEY GENERAL RENO'S OPENING REMARKS

Ms. RENO. Chairman Gregg and Senator Inouye, thank you very much for this opportunity. I appreciate your strong support that you have consistently given the Department in our efforts to deal