As is usually the case, small business, because of limited capital and credit, is finding it harder to comply with the Federal mandate than the large firms. Some of them have already closed their doors, and others may follow suit unless we can find a better way to help them.

Even with our limited legislative jurisdiction, I think we can provide assistance by exploring the Small Business Act and the Small Business Investment Act to see if we cannot amend and broaden some of these provisions to address more specifically the problems of environmental protection. We are doing that today with these hearings on H.R. 78, and related proposals.

I know, Mr. Chairman, under your leadership, these efforts will continue. I also would like to join you, Mr. Chairman, in saying a special word of welcome to my dear friend and colleague, John J. McFall, the Democratic whip. I sit as ranking minority member of the Appropriations Subcommittee on Transportation which John chairs. So we have worked very, very closely together as a team over the years in trying to deal with the Nation's transportation problems. I know he is conscientious; he is a farsighted lawmaker; he has been a very effective leader.

For these reasons, I am delighted that he is in the camp of the small businessman, and is here to try to help us solve some of the problems of mutual, national concern.

I welcome my dear and beloved friend, John McFall to our subcommittee, and tell him how strange it is to be able to sit on this side of the table looking at him on the other side of the table. We are usually side by side.

Thank you, Mr. Chairman.

Mr. SMITH. At this time, John, I want to welcome you again as the leadoff witness in this series of hearings to discuss your specific legislation.

TESTIMONY OF HON. JOHN J. McFALL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. McFALL. Thank you, Mr. Chairman. I want to thank Mr. Conte and other members of the subcommittee for the opportunity to discuss H.R. 78 with you, which I believe will help maintain the viability of American small businesses by providing them with the same opportunity as large businesses in raising long-term, low-cost financing for Federal and State mandated pollution control equipment. I might digress from my prepared statement to say that the witnesses that will follow me, from the Bank of America and other financial institutions interested in this bill, are the ones who conceived the legislation, who can answer all your detailed questions about how it might work, and what the situation is that this bill is designed to assist.

I hope that my testimony will summarize the situation, and summarize the legislation for you so you will have a clear idea of what the proposal is and the details concerning how it might work. You should ask the gentlemen who are coming after me, because they are the ones who are out on the firing line and know the situation today and who are concerned with financing small business in this pollution field.

As the situation stands today, Mr. Chairman, small businesses across the country are encountering difficulty in securing the necessary financing for the purchase and construction of statutorially mandated pollution control equipment. It is conservatively estimated that the total cost to American industry to meet Federal, State, and local pollution abatement standards will be in excess of $30 billion, and that the small business share of this total will be $5 billion to $10 billion.

H.R. 78 provides for a program of SBA insured tax exempt pollution control revenue bonds. This program will insure that small businesses have the means to meet this tremendous financial requirement.

Additionally, Mr. Chairman, I feel it is vital that Congress act expeditiously to provide the small business community with the means to meet pollution control standards. With the national economy in its present state of recession, I think all of us will agree that instead of having small businesses closing down due to their financial inability to meet pollution control standards, it is by far preferable to have them meet these standards, and thereby continue to employ their workers, produce their goods, and at the same time, produce needed jobs in the construction and pollution equipment industries.

Other witnesses, as I discussed, here today will describe for the subcommittee the type of economic hardship that is being caused by the lack of a viable pollution control financing program.

Already recognizing the substantial financial impact that meeting pollution control standards could have on individual businesses, and ultimately the economy, the Treasury amended its regulations to allow for unlimited issuance of tax exempt industrial revenue bonds to finance pollution abatement facilities. Since this amendment, 48 States have followed with special legislation to implement this type of financing.

While this type of financing was made available to all businesses, only large corporations have been able to utilize it. In fact within the past 2 years, State and local authorities have issued $3.4 billion in revenue bonds on behalf of large businesses to finance pollution control projects.

Small businesses have not been able to avail themselves of this type of long-term, low-cost financing. Unlike the bonds of large corporations, the pollution control revenue bonds of small businesses lack the credit worthiness, national recognition, size and liquidity needed to attract investor interest. Moreover, the lack of investor interest provides no incentive for the private financial community to develop this business.

Accordingly, small businesses have been forced to either borrow at higher rates for shorter periods of time, or to discontinue operations. This inequality in obtaining pollution control financing has resulted in an ever increasing economic gap between large and small businesses. Moreover, it could cause a further deterioration in the position of small businesses in the Nation's industrial structure. Their prospective shutdown would have a significant impact on a substantial segment of the U.S. economy and work force. Small businesses presently employ approximately 43 percent of the Nation's labor force, produce 33 percent of the Nation's manufacturing output, and contribute 33 percent of the Nation's gross national product.

This potential impact is illustrated further by California where 72 percent of the State's labor force is employed by the small business sector, and 20,000 firms in that sector have been ordered to meet State pollution abatement standards.

The list of those industries in which small businesses will most seriously be affected by environmental regulations is long and diversified. It goes, for example, from feedlots to mining, from textiles to pulp and paper, from transportation to chemical and petroleum processing.

Mr. Chairman, the Federal Water Pollution Control Act Amendments of 1972 require the Small Business Administration to implement a viable pollution-financing program for small businesses. The SBA reviewed existing programs and concluded that a new financing alternative was required which would insure ready availability of funds at minimum borrowing costs with repayment terms consistent with the economic life of the equipment. It also concluded that the program should be self-supporting with minimum loss risk, and involve maximum participation by the private sector. In addition, the program should require minimum outlay of Federal funds, and use of Federal personnel.

H.R. 78 meets these criteria, and provides small businesses with the same type of financing now available to big businesses. Under this legislation, a number of small businesses within a given State would be grouped into individual bond issues which would be sold by the State or local pollution control authority.

The bond proceeds would be used to construct the facilities needed by the firms and leased back to them. The local government entity would own the equipment, but would authorize the individual business as its agent for the construction. The lease payments would provide the funds to meet bond principal and interest. The SBA, under the authority of H.R. 78, would insure the firm's lease payments for a fee adequate to cover costs and projected losses.

This legislation would enable small businesses to obtain adequate needed long-term, low-cost financing because industrial revenue bonds have an established institutional market; the SBA lease insurance makes the bonds of high investment-grade quality; the tax exempt status of the bond offerings reduces the interest cost; and the longer term bond schedule provides sufficient repayment period.

The program benefits additionally from the fact that there would be an absolute minimum outlay of Federal funds and manpower to support the program because it is self-supporting, and overseeing the financing would be done largely at the State, local, and private levels. In addition, by grouping the small businesses, it will be possible to provide them with significant savings in engineering design and environmental management costs.

It is calculated that a 2.8-percent insurance fee, coupled with a 3-month prepayment of lease rentals, will generate sufficient revenue to cover the SBA's administrative overhead, and also provide a reserve fund to cover defaults of 15 percent to 20 percent. A default incidence of this magnitude is high compared with the historical experience of present SBA programs.

A review of the situation in my own State of California, may be helpful to the subcommittee in understanding what the dimensions of the situation are.

The California Pollution Control Financing Authority was empowered by law to issue up to $200 million in revenue bonds for pollution control purposes. Of this initial amount, $183.2 million, or 91.6 percent, was used by large corporations. The authority had to pass a special resolution reserving the remaining $16.8 million, or 8.4 percent, for small businesses.

Additionally, the State legislature has made it clear that no additional funds will be authorized for pollution control financing until a viable program for small businesses has been developed. The authority has attempted to develop a program and to finance small business projects. It has been frustrated in its efforts, however, by the same problems that confront small businesses across the countrynamely, the inability of small businesses to command the long-term, low-cost financing for pollution equipment that they require in order to maintain their financial stability. To date, the authority has financed only two small business projects, aggregating $700,000.

Mr. Chairman, I thank you and the members of the subcommittee for this opportunity to discuss H.R. 78, and I hope that the subcommittee will move in the near future to further consider this legislation, and the serious problem of small businesses that it addresses.

I would like to have you listen to the other witnesses that are coming after me because they have, as I told you, the facts right from out in the field from their attempt to work out these problems. Additionally, they know the existing conditions.

I thank you again.

It is a little strange to be sitting on the other side of the table, Mr. Conte. We are generally together and have to suffer through these statements.

Mr. SMITH. Thank you very much, Mr. McFall.

It is a very concise statement, right to the point, and a good statement with which to start this series of hearings.

I want to say that I agree that the bill seems to meet the criteria that SBA has concluded should be included in the bill. However, we have not yet been able to receive endorsements or comments from SBA on the bill; but we are hopeful that we will receive them shortly. Mr. Conte?

Mr. CONTE. One question, John.

Your proposal for lease guarantees for water pollution equipment is really innovative. As you probably know, we now have authorized, but inadequately funded, SBA direct loans for defraying the cost of pollution abatement. The problem of direct loans, as I see it, is that they will require a great deal of money, a great deal of substantial appropriations from the Congress. You have estimated yourself billions of dollars, some say $10 billion, over the next 10 years to meet the pollution abatement requirements. Compared with that estimation, the $800 million which is authorized in section 7(g) of the Small Business Act appears to be totally inadequate, as you mentioned in your statement.

As members of the Appropriations Committee, we know the kind of budget deficits we are facing. I think you will agree with me that the chances are pretty poor of getting several billion dollars in appropriations to adequately fund the direct loan program. Therefore these were, I imagine, your considerations that led you to look at the lease guarantee prograin for a solution.

Mr. McFALL. The important thing about this, I think, is that even this legislation may not be perfect. Every proposal needs, I believe, the kind of attention that you gentlemen will give to it. You have the legislative experience in the small business field; you know how to tailor this to the situation. You may want to make changes in it after you hear the witnesses and get some kind of comment from the administration. There may be some very important changes that need to be made.

The basic idea, I think, is a good one. The thing that impresses me about it is that it comes from the Bank of America and the other financial institutions. They are out there trying valiantly to provide this kind of financing to small businesses. They have come up with this idea because they do not see any other way to get this kind of money in the financial community that is needed. We should have some idea like this when we know we may fall short in coming up with the funds.

The banks, I think, see this as an opportunity to be of service to the community-a service they could not otherwise provide.

Mr. CONTE. Without large expenditures and appropriations?

Mr. McFALL. I think so. The witnesses that will come after me will be able to explain this better to you. But this bill will give them more power to assist in the accumulation of funds for the small businesses for this kind of badly needed pollution control. I have in my district an iron foundry. It is small-75 employees, something of that nature. They have to meet the pollution control requirements. It is going to require something like a $300,000 investment, something like that. It is most difficult for this man to do this. It is a wholly owned private business.

Mr. CONTE. If I may, Mr. Chairman, I have other areas I wish to ask about-Congressman Burton came to me last week in regard to the dairy farmers. Dairy farmers are not eligible for loans for pollution abatement. I think we intend to address ourselves to that problem in future hearings. I wonder if you think your proposal should apply to dairy farmers.

Mr. McFALL. Yes; I have a number in that same category. There are a number of dairy farmers in my district. They are going to have problems with the runoff from the dairy farms, spreading it out on the fields, and so forth. It does produce a pollution problem, which is very serious.

Mr. CONTE. Thank you.

Mr. SMITH. Mr. Bergland?

Mr. BERGLAND. Thank you very much, Mr. Chairman.

Mr. McFall, why is it that of the $200 million which the State of California authorized for this purpose, big businesses were able to get almost all of it. Were the small businessmen not interested in availing themselves of this service, or were they too late?

Mr. McFALL. I really do not know the answer to that. That is what the statistics show. I think that if you ask the question of some of the people who are coming after me, they probably would know the answer to it. I would have to guess at it.

Mr. BERGLAND. All right, sir. Thank you very much.

Mr. SMITH. Mr. Hanley?

Mr. HANLEY. I want to commend you on your excellent statement and your keen interest in this subject matter and the initiative you