TESTIMONY OF HON. THOMAS S. KLEPPE, ADMINISTRATOR, SMALL BUSINESS ADMINISTRATION; ACCOMPANIED BY GREG AUSTIN, GENERAL COUNSEL

Mr. KLEPPE. Yes, thank you, Mr. Chairman. Silvio, good morning. Thank you for the opportunity to come up here and talk with you about the legislation that you are considering. I would ask unanimous consent that my statement, in full, be printed in the record.

Mr. SMITH. Without objection.

[Mr. Kleppe's prepared statement follows:]

PREPARED STATEMENT OF THOMAS S. KLEPPE, ADMINISTRATOR, SMALL BUSINESS

ADMINISTRATION

Mr. Chairman, I very much appreciate the opportunity to appear before this subcommittee and to address the specific topics listed in your invitational letter: Pollution control financing, and assistance for small businesses engaged in agriculture.

POLLUTION CONTROL FINANCING

Early in the year, this Committee requested the views of the Small Business Administration regarding H.R. 78, a bill "To amend the Small Business Investment Act of 1958 to create a pollution control financing program for small business." My testimony on this subject, therefore, will be an elaboration of the views forwarded to the subcommittee.

H.R. 78 would authorize SBA to guarantee, either directly or in cooperation with a qualified surety company or other qualified company, through a participation agreement with such company, the full payment of rentals or other amounts due (for example, the purchase price) under so called “qualified contracts," where the SBA determines that small business concerns are, or are likely to be, at an operating or financing disadvantage with other business concerns with respect to the planning, design or installation of "pollution control facilities,” or the obtaining of private financing therefor.

It would further provide that SBA fix a uniform fee which it deems reasonable and necessary for any guarantee issued, to be payable at such time and under such conditions as may be determined by SBA. The fee would be subject to periodic review in order that the lowest fee that experience of the program showed to be justified would be placed in effect. SBA would also be permitted a uniform fee for processing applications. Further, SBA could require that an amount, not to exceed one-fourth of the average annual payments for which a guarantee is issued, be placed in escrow upon such terms and conditions as SBA may prescribe.

Acting in our role as the small business advocate, we are obliged to point out the favorable view on H.R. 78 of a concerned segment of the small business community.

Forty-eight states have enacted legislation to accommodate pollution control financing through the issuance of industrial revenue bonds (IRBs) which are tax exempt as to interest received by the holders of the bonds. Considerable use has been made of this type of financing by large corporations and utilities. A small segment of the business community has expressed a need for this type of financing. The present State and local government legislation providing industrial revenue financing does not exclude participation by small business. In fact, the State of Illinois' Industrial Pollution Control Financing Authority has an FY 1976 bonding authorization of $250 million, of which $75 million is specifically allocated to finance pollution control facilities for small business.

However, small businesses lack both market and credit recognition, which effectively bars them from obtaining tax exempt pollution control bonds in ne general marketplace. This increases the competitive disadvantage under which

small business operates by putting the large, well-known firm in a position to receive low interest, long term financing, while the small operator is restricted to short term bank loans and higher interest rates. Thus, the affected segment of the small business community favorably views H.R. 78 as a method to provide needed financing to small firms that is presently unavailable to them.

The Administration has consistently maintained a Federal credit policy which opposes the Federal guarantee or support of tax exempt financing. The Administration policy on this method of financing is firm for the following

reasons:

First, the subsidy provided by the guarantee of tax exempt financing is highly inefficient and costly for Federal, State and local governments. Federal taxes on interest income are foregone when tax exempt bonds are used instead of taxable securities. State and local taxes are foregone because of the exemption of such bonds from many of the States' income, personal property, and certain other property taxes. These lost tax revenues exceed the benefits to the borrowers obtained through lower interest rates on tax exempt borrowing; the difference represents subsidies to the high income investors who are clearly unintended beneficiaries.

Second, this type of financing would contribute to the erosion of the value of tax exemption for State and local governments. Federal guarantees, as proposed under H.R. 78, will make these issues preferred to any other issues using tax exempt financing. Failure to constrain such use of the guarantee may threaten the structure of the tax exempt market. For example, an increased supply of Federal guaranteed tax exempt bonds would certainly increase the borrowing costs to issues of traditional nonguaranteed State and local bonds which are essential to finance basic public works and schools. Congress has shared this concern with this type of financing, as is evidenced by the recent passage of at least 12 statutes to preclude such guarantees of tax exempt financing.

The Administration is opposed to legislation which would authorize the guarantee of tax exempt financing for private purposes. The Administration has held to this policy in at least 8 new programs in the last five years, and the policy is being implemented administratively in Agency programs where the issues have been raised. It is suggested that both the Congress and the Administration should explore other less costly and more efficient ways to provide pollution control financing to small businesses.

ASSISTANCE FOR SMALL BUSINESS ENGAGED IN AGRICULTURE

The Committee has requested that I discuss the topic of SBA assistance for small businesses engaged in agriculture such as is provided in H.R. 3483, H.R. 3799, H.R. 5675 and Section 1 of H.R. 5982. Reports on these bills have been forwarded to the Committee.

H.R. 3483 and H.R. 3799, both bills "To amend the Small Business Act to expand the definition of small business concern to include agribusinesses" would authorize the Administrator of the Small Business Administration to establish criteria and to define agribusinesses in such a manner as to expand the definition of "small business concern" for purposes of the Small Business Act.

The action called for in both bills has been taken, in that the criteria have been defined and established for assistance to agribusinesses. SBA Regulation 120.2(d) (9) includes criteria for the eligibility of agricultural activities and agribusiness. In addition, Appendix 3, "Financial Assistance for Agribusiness Activities," of SBA SOP 50-10, "Policies and Procedures for Financing Function states present Agency policy on the subject. Since the bill leaves the definition of agribusiness to SBA it would not affect our present policy and is, therefore, technically superfluous.

For this reason, SBA opposes the enactment of the bills.

H.R. 5675, a bill "To amend the Small Business Act to include small business establishments primarily engaged in the production of cow's milk for purposes of obtaining loans to assist them in meeting the requirements established under the Federal Water Pollution Control Act" would extend to SBA the authority to provide water pollution control loans to producers of cow's milk.

H.R. 5675 would extend assistance to the first of numerous price-support products which are considered agricultural in nature and therefore precluded from SBA assistance under Section 7 (a) of the Small Business Act. Consequently, if this legislation were enacted, the SBA conceivably could be placed in the precarious position of providing financial assistance to agricultural producers who

are receiving price-support assistance for their products while turning down a nonagricultural applicant for deficient creditworthiness.

The distinction between business matters and agriculture/farming matters has been useful in the past and should be maintained in the future. The separation of authority between the Small Business Administration and the Department of Agriculture has resulted in better service to the farmers and to the small business community in that each sector has been serviced by that agency possessing the most expertise in the particular field concerned.

My reading of H.R. 5675 is that it would serve only to blur the distinction between farmers and other businessmen insofar as eligibility for loans is concerned. Some of the most difficult legal problems this agency has faced in the past have been created by applications for business loans for farmers, or farm loans for businesses.

H.R. 5892, a bill "To clarify the eligibility of certain small businesses for loans under the Small Business Act, to aid, protect, and preserve small businesses in meat production and marketing, and for other purposes," although entitled the "Small Business Meat Producer and Marketer Protection Act of 1975," would not be limited to meat producers and marketers and would, in fact, make eligible for SBA assistance many, if not all, firms presently ineligible for SBA assistance because they are eligible for financial assistance from other Federal agencies. This effect is created by Section 1 of the bill.

Section 7(a)(1) of the Small Business Act presently bars financial assistance to an applicant "unless the financial assistance applied for is not otherwise available on reasonable terms." SBA has interpreted this language to mean that where a program of Federal financing exists, for which the applicant is eligible, it cannot be said that the assistance sought from SBA is not otherwise available on reasonable terms. Section 1(a) of the bill would add the words "from private sources" at the end of Section 7(a) (1), thus making eligible for SBA financial assistance a firm that is also eligible for financial assistance from some other Federal agency.

Section 1(b) of the bill would amend Section 18 of the Small Business Act. Section 10 of our Act presently sets forth a general rule that SBA shall not duplicate the work or activity of any other Federal department or agency without specific authorization in the Small Business Act. The proposed amendment would forbid duplication only of "the work or activity of any other department or agency of the Federal Government which has promulgated and is operating and administering a loan program under which all qualified applicants are being granted loans" unless specifically authorized under the Act.

It is not clear whether the term "private sources" is intended to be read literally so as to exclude assistance from state and local agencies, or to be read as meaning only "non-Federal sources." Also unclear is whether "private sources" include personal resources of the applicant's principals, i.e., its owners, officers, directors, stockholders, and their close relatives.

Generally speaking, agricultural enterprises are not eligible for SBA financial assistance. When SBA extends financial assistance to "agri-business" enterprises engaged in activities closely related to agriculture, it does so on the theory that they are more in the nature of business enterprises than agricultural enterprises. The language of this bill would give SBA an implicit mandate to duplicate the activities of any other Federal agency unless the activity consisted of offering loans to all qualified applicants. The proposed amendment would encourage some small businesses to engage in comparison shopping, so to speak, among Federal agencies.

Legislation of the sort contemplated in Section 1 of this bill could well interfere with the accomplishment of the objectives sought by the creation of lending programs in other agencies and would foster many instances of SBA working at cross purposes with them.

SBA therefore recommends against enactment of H.R. 5982.

Mr. Chairman, this completes my statement. I would be pleased to answer any questions you or the Subcommittee may have.

Mr. KLEPPE. With your permission, I would just like to make some brief comments regarding the provisions of my statement.

Mr. SMITH. All right.

Mr. KLEPPE. My statement is an elaboration of the views on H.R. 78 requested earlier this year by the subcommittee.

Page 2 of my statement reviews the provisions of this bill. I would like for you to understand that I am here as a member of the administration and, consequently, there is some recitation in my statement about the administration's position. But, I would like to talk about what we deserve as well as what has been cleared with regard to supporting a favorable view on H.R. 78, because it does pertain to a very, very concerned agreement of our small business community, which we work with all the time.

We think, Mr. Chairman, it is very interesting to note that 48 States have enacted legislation to accommodate pollution control financing through the issuance of industrial revenue bonds, which are tax-exempt as to interest received by the holders of the bonds. Considerable use has been made of this type of financing by large corporations and utilities. I would like to add further thought to what the previous witness, the gentleman from California from the treasury, has said regarding the utilization of these bonds in California by the larger corporations. A small segment of the business community has expressed a need for this type of financing. The present State and local government legislation providing industrial revenue financing does not exclude participation by small business. In fact, the State of Illinois Industrial Pollution Control Financing Authority has a fiscal year 1976 bonding authorization of $250 million, and they have set aside $75 million, which is specifically allocated for financing of pollution control facilities for small business.

However, here is the real problem, and the previous witness recited some of this. The small businesses lack both market and credit recognition, which effectively bars them from obtaining this tax-exempt pollution control opportunity that exists for big business. This increases, we believe, the competitive disadvantage under which small businesses operate by putting the large, well-known firm in a position to receive low interest, long-term financing, while the small operator is restricted to short-term bank loans and higher interest rates. Thus, the affected segment of the small business community favorably views H.R. 78 as a method to provide needed financing to small firms that is presently unavailable to them.

Now, Mr. Chairman, I think it is fair to say that it is not our prerogative or our business here right now to talk in detail about the tax consequences involved. This is a position that the administration, through other departments, would comment on. However, I do have a recitation of some of the reasons why the administration has consistently maintained a Federal credit policy, which oppose the Federal guarantee or support of tax-exempt financing.

Mr. SMITH. Even so, it would not be denied, would it, that if big businesses can utilize industrial revenue bonds, the small businesses ought to be able to also, even if you are opposed to both?

Mr. KLEPPE. I would not deny that that condition exists and this is why I wanted to specifically call attention to what I had to say on page 3, Mr. Chairman.

I think I would just leave the balance of my statement to suffice insofar as H.R. 78 is concerned, Mr. Chairman. If you would like to break here for any questions or comments on that bill, or would you like me to just continue on with the statement?

Mr. SMITH. Why don't you just go ahead?

Mr. KLEPPE. All right. The other items that you had under consideration, Mr. Chairman, are H.R. 3483, H.R. 3799, H.R. 5675, and section 1 of H.R. 5982. These deal with SBA in conrction with small businesses engaged in agriculture.

H.R. 3483 and H.R. 3799, both bills

To amend the Small Business Act to expand the definition of small business concern to include agribusinesses would authorize the Administrator of the Small Business Administration to establish criteria and to define agribusinesses in such a manner as to expand the definition of "small business concern" for purposes of the Small Business Act.

On the next page I say that we already have this authority and we already made such a definition and therefore, we would consider that bill to be technically superfluous. For that reason as one, we would oppose the enactment of that bill.

H.R. 5675, a bill—

To amend the Small Business Act to include small business establishments primarily engaged in the production of cow's milk for purposes of obtaining loans to assist them in meeting the requirements established under the Federal Water Pollution Control Act

would extend to SBA the authority to provide water pollution control loans to producers of cow's milk.

Now, this would extend assistance to the first of numerous price support products, which are considered agricultural in nature. Therefore, it is precluded from SBA assistance under section 7(a) of the Small Business Act. Consequently, if this legislation were enacted, the SBA conceivably could be placed in the precarious position of providing financial assistance to agricultural producers who are receiving price support assistance for their products while turning down a nonagricultural applicant for deficient creditworthiness.

The distinction between business matters and agricultural-farming matters has been useful in the past and should be maintained in the future. I suppose it could be said here, Mr. Chairman, that all farmers could be considered businessmen, but all businessmen cannot be considered farmers. And I think it is important to recognize this distinction when you talk about SBA identifying all farmers or categories of farmers as business people. Because then we get into the question of whether or not you need this over in agriculture or you need it in SBA. This has been a very important item for us in trying to decide what is agribusiness and what is related to agriculture and what gets supported over there in Agriculture or what does not. I am convinced of the fact that the Congress has openly and knowingly eliminated the duplication question that used to be before us. I have no concern about that any more. But, the separation of authority between the SBA and Agriculture has resulted, we think, in better service to the farmers, and I guess that can be argued, and to the small business community, in that each sector has been serviced by an agency that does have the most experience and hopefully the most expertise in the particular area concerned.

My reading of this H.R. 5675 is that it would only serve to blur the distinction between farmers and other businessmen, insofar as eligibility for loans is concerned. Some of the most difficult legal problems this agency has faced in the past has been created by applications for business loans for farmers, or farm loans for businesses. And that is a tough distinction to make lots of times.