Andrew White, Director, Center for NYC Affairs, Milano Graduate School, New York University: Good morning. My name is Andrew White. I direct the Center for New York City Affairs at the New School, at the Milano Graduate School of Management and Urban Policy. And I know Ive really finally stepped into the true think tank world when you have free-standing banners with our co-sponsoring organization. Were going to have to compete now. Im glad to see you all here. The Milano Graduate School, our students study management and urban policy, particularly management in the non-profit and for-profit sectors, which brings us straight to the topic of todays forum. I think when you get down to it I see some entrepreneurs from the for-profit end, a lot of entrepreneurs from the non-profit sector here, which I think, in consideration, probably the only difference is that the for-profit entrepreneurs here know how to take big risks, and when it works, make a comfortable living. Those of us in the non-profit sector take moderate risks and are guaranteed never to make a decent living. But were doing it for the greater good, theoretically.
Thank you all of you for coming I want to introduce Marc Jahr, of Citibank, who is the generous sponsor of these forums that weve been collaborating with the Center for an Urban Future on, and his banner is going up over there on the far side as we speak. Marc, myself and the Center for an Urban Future all have this distinguished deep-backed history, which is that weve all been affiliated with City Limits magazine one way or the other over the last 20 years. But I think weve all come to a really interesting point where were talking about the Bush administration and how it affects economic development in the city, especially around small business. Thats not an area where you see a lot of thought being put from the sort of progressive side of the think tank world, but its an urgent area, and Im looking forward to todays discussion. Marc?
Marc Jahr, Vice President, Citibank Community Development: Thanks. Good morning everyone. This is the fourth, I think, of a series of forums that weve sponsored, along with the Center for New York City Affairs and the Center for an Urban Future, on, in effect, the role of small business and entrepreneurialism within the citys economy. And I think the first one was on kind of the broader economic development strategies of the city, the second was on the role of immigrants on the economy and the abundance of energy theyve brought to the city and to the citys economy life. The third session, I believe was on the role of biotechnology or large hospital complexes in the economic life of the city. And now we come to the fourth one, on the impact of the current administrations policies on small businesses, not only within the city but within the United States. So, Citibank Community Development, Im the Market Director for Citibank Community Development, is enormously pleased to cosponsor these workshops. We think theyve come at an appropriate time, a time of great change in the city, a time of great opportunity, as they usually say, and also of great challenge. We have a wonderful panel here today. Im pleased that everybodys been able to make it here. Im going to introduce Jonathan Bowles and Jonathan will introduce the panelists and then well move on. Thanks.
Jonathan Bowles, Research Director, Center for an Urban Future: Thank you, Marc. Its a real pleasure to be here and Im excited about todays forum. Were grateful to you and to Citibank for supporting this forum series, and as always, thanks to Andrew and Fred Hochberg and the New School for hosting this event. I think most of you are already familiar with the Center for an Urban Future. For those who are not, just quickly, we are a non-partisan policy institute that writes reports and holds forums about small business development, entrepreneurship, economic development, workforce development, and other key issues to New York Citys future. This is actually the first of a series of forums this year that the Center for an Urban Future and the Center for New York City Affairs is doing. After a really successful series last year, were really excited about whats to come in the next couple months. The next one will be on March 17, so please mark your calendars, right here at this auditorium, titled Tapping the Entrepreneurial Vitality of New Yorks Neighborhoods. Were excited that New York City Comptroller Bill Thompson will be among the panelists, and well also be holding a forum on April 6, titled The Boroughs Outside of Manhattan As An Engine for Economic Growth. The details are still coming together on these forums, so please check out our website, www.nycfuture.org for more information or to RSVP.
Todays forum, of course, is titled The Bush Administration and the Future of Small Business Growth in New York, and we have some very distinguished panelists and Im going to start by introducing them. Closest to me is Eric Gioia, who was elected to the New York City Council in 2001, representing neighborhoods in Western Queens such as Long Island City, Astoria and Woodside. Hes the chair of the Councils Oversight and Investigations Committee and as chair, he has exposed inefficiency, waste and mismanagement, and worked to make government cost less and work better. Hes also served on the served on the Finance, Land Use, Economic Development, Waterfront Committees, and others. He previously served in the White House during the Clinton administration and practiced law at Milbank, Tweed, Hadley & McCloy. Councilmember Gioia also has a keen understanding of small business issues, having grown up in his family's flower shop. His family has owned and operated Nunziato Florists, on Roosevelt Avenue and 52nd Street in Woodside, since 1901. His father, uncles, and grandmother continue to run the neighborhood institution, and work there every day. Its a pleasure to have you, Eric.
Next to him, Fred Hochberg, is currently Dean of the Robert J. Milano Graduate School of Management and Urban Policy, right here at the New School. He has more than twenty-five years experience in business, government, civil rights and philanthropy. From May 1998 to January 2001, he served as Deputy, and then Acting Administrator of the U.S. Small Business Administration. He also served on President Clinton's Management Council. At the SBA, he managed operations for the agency and directed the delivery of a comprehensive set of financial and business development programs for America's entrepreneurs, with particular outreach to women and minorities. Before his appointment to the SBA, he served as president and chief operating officer of the Lillian Vernon Corporation. In more than 20 years in the private sector with the Lillian Vernon Corporation, he led the transformation of a small family mail order company into a publicly traded direct marketing corporation, one of the great success stories of American entrepreneurship. Dean Hochberg's extensive record of community service includes board service in the following organizations: the Citizens Budget Commission; Lillian Vernon International House at New York University and Seedco, where he chairs the Empowerment Reinvestment Fund.
Madeline Marquez currently serves as the Executive Director of the Bronx Initiative Corporation, a position she has held since the organization was established in 1998 and designated by the U.S. SBA specifically to serve Bronx businesses. The Bronx Initiative Corporation works with the SBA and private lenders to provide financing to small businesses, focusing on sectors of the Bronx's economy, including industrial, commercial, manufacturing, and service firms. The BIC, which is sponsored by the Bronx Overall Economic Development Corporation, has made in excess of $7 million in loans to Bronx businesses, which have saved over a thousand jobs and created nearly a thousand new ones in the Bronx. Under her leadership, BIC has quickly grown to rank 21st among the top 50 New York area SBA lenders for 2003. During her career in banking and lending, through her work at organizations like the Brooklyn Economic Development Corporation, the Community Coalition for Fair Banking, and Chemical Bank, she has been a skilled and aggressive advocate for business, helping entrepreneurs and fledgling companies, as well as non-profits, gain access to private and public financing.
Michael Pappas was appointed as the U.S. Small Business Administrations Associate Administrator for Field Operations in May 2003. As Associate Administrator, he provided executive direction to 1,700 SBA employees throughout the Agencys 10 regional and 68 district offices. Prior to his current position, Pappas served as Regional Administrator of the SBAs Region II with responsibility for the delivery of the agencys financial assistance, management counseling, business development and minority enterprise development activities throughout New York State, New Jersey, Puerto Rico and the U.S. Virgin Islands. Before joining the SBA, he was the director of development for Pillar of Fire International, an educational and charitable association, and from 1997 1999, he was a member of the U.S. House of Representatives, serving as a member of the Small Business, National Security and Government Reform committees, and as Assistant Majority Whip. His private sector experience began while working with his father at Pappas Insurance Agency, a family-owned business.
Finally, Fred Teng is President of a media and entertainment company called DVS New York, LLC, a position he has held since 2002. Previously, he founded and was President of Noble Communications Group, Inc., a company which provides a comprehensive suite of streaming media solutions. In 2003, he was appointed by the Administrator of the U.S. Small Business Administration to serve on the National Small Business Development Centers Advisory Board. And in 2004, he was appointed by the Mayor and the Commissioner for the Department of Small Business Services to serve on New York Citys Minority Women Business Enterprise Advisory Board. From 1993 to 1999 he was Director of Marketing Communications in charge of the Asian Markets at AT&T, and prior to that, he spent over a decade on Wall Street.
Now, today were not going to have any opening statements from the panelists. Were going to jump right into discussion, but Im just going to take 30 seconds to try to really frame the debate of what were going to be talking about today. I think a lot of you know, that are familiar with this issue, that last week, President Bush unveiled his budget. When he did so, he called for increasing overall lending levels for the Small Business Administration, to a record level. But his plan also cuts the agencys overall budget by three percent, calls for elimination of the SBAs microloan program and the PRIME program, a lending program targeted at very low-income entrepreneurs, and it ends government support for equity investments by SBA-backed venture firms, called small business investment companies.
The Presidents budget would also cut support for the CDFI fund, from $55 million to $8 million, scale back funding for the Manufacturing Extension Partnership Program by 57%, and cut substantially from the Community Development Block Grant program. Its likely that some of these cutbacks are going to be reversed by Congress. But, not surprisingly, many small business advocates are concerned. Others, however, point to figures which show that SBA-backed loans reached record levels last year, both nationally and in New York. They say that these programs can continue to proceed, even with cutbacks in operational support. So, let me start by asking the panelists: policymakers and the press in New York rarely focus significant attention on the role of federal programs in supporting economic development and small business growth locally. How important are federal programs, such as the SBAs lending initiatives, to New York Citys economic development? And will cutbacks in funding to several of these programs have a significant impact on businesses in New York? And I want to start with Michael, if we could, and then maybe start from this end of the table and go down.
Michael Pappas, Associate Administrator for Field Operations, US SBA: I would prefer to maybe be one of the last people to respond.
Jonathan Bowles: Okay, I wanted to give you the opportunity first, so why dont we start here with Councilman Gioia?
Eric Gioia, Member, New York City Council: Thank you very much, and first let me thank everyone for getting up early on a Tuesday morning and joining us, particularly the small business owners in the audience. You are the middle class tax base in this city and the embodiment and realization of the American dream, so I thank you for taking the time to spend with us this morning. The part that, to me, that affects me the most in my day-to-day job, which is a member of the City Council and going out into neighborhoods and trying to make New York City work better for citizens, is the Community Development Block Grants. When you talk about taking away $207 million from New York City, what youre talking about is less day care slots, youre talking about less funds for senior centers, youre talking about things that we do every day to try to make the city work better. So, two things are going to happen. One, either the city has to step up and fill that gap with city operating money, which again means youre looking at either a higher tax burden or less services, or, two, we let the programs fall by the wayside, and thats a problem. And you hit on a very good point, which is most people are disconnected from federal dollars and federal programs in their day-to-day life.
Two years ago, when President Bush proposed cutting Americorps funding, people in my neighborhood I represent a fairly conservative district they said: Well, what is this Americorps program? Do we really need a bunch of rich kids singing Kumbaya, walking around the campfire? We should cut this. And I went out to P.S. 229, where an Americorps subsidiary, City Year, does the after-school program, and I told the parents, I said this is Kumbaya. If you dont appreciate your children having this after-school program, then yes, this cut doesnt affect your life. Well, in fact, it does. And they were quite outraged by it. Eventually the money was put back in the budget. I say that to say that these federal cuts, particularly the Community Development Block Grants, have a huge impact on New York City, really in hundreds and really thousands of ways across the city, ways that you really dont associate with the federal government in Washington, but where the funding really does enable us on a local level to go out and make a real difference in peoples lives.
Fred Hochberg, Dean, Milano Graduate School, New School University; former Deputy Administrator of the U.S. Small Business Administration: Im very happy to be here. Normally, Im the introducer and then I dont have to say much, so Im delighted to be a panelist today. And I wanted to just say one thing. I spent three years in Washington at the SBA, and I just met I hope I pronounce this right Jose Sifontes why dont you raise your hand in the back? Hes the District Director in New York. And one of the things I had great admiration, when I worked in government, was the dedication of people at the SBA, who really work day in and day out to try and deliver services to Americas small business owners. That said, I am concerned because I got a copy of the press release that the SBA and Bush Administration released the day of the budget. And Im not an idiot, I know what this means fiscally responsible SBA, Fiscal Year 2006 budget provides record capital for small business. Now, I know what fiscally responsible means it means less money. This is not hard to understand. This year, the SBA has a budget of just under $600 million, not even $600 million. The last year I was in Washington, the SBA had a billion dollar budget. So, all in all, over the last four years, its a 40% drop in resources to the SBA.
And that concerns me. It concerns me because it puts a lot of pressure on small businesses, it puts a lot of pressure on banks like Citibank and others who are trying to provide financial support to small businesses. And to just give you one example, the SBIC program Small Business Investment Company really is a way that the federal government provides venture capital for firms that are far too small to go to any venture capital firm. Well, this SBIC program, in its 30 year history helped provide seed capital for Intel, AOL, Capital Grille, and a dozen other companies. The federal government has gotten back its investment hundreds of times over the small amount of money used to subsidize this program. So, its bewildering to me, in an economy like this, in a shaky economy, to kind of cut support to this kind of cut support to this kind of core sector.
Madeline Marquez, Executive Director, Bronx Initiative Corporation: Good morning. Hi, Im Madeline Marquez and while I sit up here with a program that has not been cut at this point in time, there are still implications that may affect the program, and Id like to highlight those. While the Congress increased our debenture size from, in the past, being up to only $1.5 million dollars to $1.5 at this part in time to $2 million to economically deprived areas and included also a $4 million debenture for manufacturers, I dont see at this point in time that it has accounted for that expansion, in the debentures, within the budget. There is a national organization called NACO that has taken up that issue, so I am not going to venture at this forum to even imply how theyre going to deal with that issue, but I think it will become in the budget of 2006. Needless to say, at this point in time, the SBA 504 program is in tact, is available, and I think it is one of the best tools that there is out there at this point in time, for businesses that are looking to expand. I dont think theres anything else that allows a small entrepreneur to just put down 10% in partnership with the bank to provide 50% of the financing and then through the Bronx Initiative Corporation, afford them 40% financing. I think Im going to leave it there for now.
Michael Pappas: Thank you very much, ladies and gentlemen. Im glad to be here and to talk to you about small businesses and what the SBA is doing and what the Bush administration believes is important. The question was what can policymakers or the press do here in New York City to help make the public Im paraphrasing the question more aware of federal programs like the SBAs programs. When I joined the SBA back in 2001, it was just a short time after the tragedy of September the 11th. And we all know the devastation that that terrorist attack had on our area and the people, literally thousands and thousands of people. Some lost their lives, some lost businesses and it was a pretty devastating situation.
One of my first series of efforts as the Regional Administrator was, frankly, to try to promote our disaster assistance program. We were fortunate to have a network of lenders Citibank is represented here, one of many lenders here in New York our network of small business development center professionals and Joyce Moy from the LaGuardia SBDC is here. Joyce, if you would stand or wave your hand so people know youre here. Jose was not with the SBA at the time, but Herb Austin whos the Deputy Director, Herb if you would raise your hand, working at the SBA. And we had them and SCORE counselors Service Corps of Retired Executives retired business owners and professionals who volunteer their time, as well as the Womens Business Center professionals and probably a lot of other people Im leaving out. And they joined forces with our disaster assistance professionals who came literally from all over the country to help provide information, help people complete applications to try to make them whole or as close to whole as possible after that tragedy.
But my focus originally was to promote that program. And it was amazing to us how some even in the local media and others were not aware of the SBAs disaster assistance program. And I dont fault anyone for that you normally learn about something when you need to know about it. But we were fortunate to have the cooperation of state officials, city officials, and that, at least, from my experience since then, having worked with the SBA since then, the partnerships that were created from that tragedy really have helped the SBA here in New York and elsewhere, to grow.
Some of the statistics that were mentioned earlier and Ill mention here today, probably now and later, really speak to a concerted effort, a partnership that we have under our administrator, Hector Barreto, have been instructed, frankly, to emphasize, to try to ourselves, as Regional Administrators, people at Jose and Herbs level, to try to foster and create greater partnerships. Thats with the private sector, thats with organizations, with the city, the state, which we have done through the Empire State Development Corporation, through the citys Small Business Services office and Commissioner Walsh, weve developed great partnerships, and frankly are trying to do more and more of that every day. The statistics for the success here in New York are something were very proud of, but it didnt happen by accident. It happened by the hard work and the partnerships, it happened because President Bush himself told his subordinates that he wants the federal government to be focused on results, to look at programs, to try to measure our success not through the length of time it takes to propose and to institute a program, no matter how well-meaning it is, but: what are the results? What are the tangible, measurable results that we can point to?
And so, our administrator, Hector Barreto, began his tenure in the middle of 2001, just a few weeks before September 11th, and began what we refer to as an internal transformation of the agency. And I think with all agencies, programs at any level, even the private sector, periodically its good to look within and to see how things can maybe be updated. And as circumstances change and relationships change, greater dependence upon the participating lenders, so weve begun a partnership with them in transforming our agency with our own staff that have really made some of the statistics that Ill point to later, possible. But we are committed to trying to improve the visibility of our SBA. Jose here in New York, with Herb, has really done a remarkable job in doing that. And frankly, for all of you that may not have had any contact with the SBA, I hope that in some small way you may, from this point forward, consider yourselves as an ambassador to help us connect with the people who can be helped by our services, the umbrella of our services with the services that we have available through ourselves or through some of our partnering organizations.
Fred Teng, President, DVS New York LLC; Member, National Small Business Development Centers Advisory Board of U.S. SBA: Thank you. From a small businessmans perspective, I think the focus of the business is the business itself. Theres not enough money in this world that can be pumped into any business if the business is not well thought-out in the first place. So, while funding is very important and I think there are different alternatives in terms of getting funding, I also have been very fortunate serving on the national advisory board of the Small Business Development Center, which I think is something that people might not have heard of. It is federal funding over $80 million worth, close to $90 million a year it is a partnership between federal and state and local government, theres 1100 small business development centers all over this country, and they usually are held out of a college and probably millions of small business people have been helped, from counseling, to helping them to draft their business plan, to see through to their success. I also look at SBA as I get to know it more, because of my role, its not just the lending itself. If you go to the SBAs website, theres so much information which I think a lot of businessmen have not taken advantage of teaching you how to start a business, go through all the checklists, how to grow a business.
As a businessman, I tell you, I know sometimes we have a passion of a product or a service that we want to launch and we think thats the best thing in the world and were not listening to anyone else tell us why this cannot work. But, as we go through this and a couple of businesses later, you learn from it, and I think a lot of this is technical help is much more helpful than just getting the money from someone. Also, I also think theres a burden on the small businesses, that if we can ease these regulations somewhat, such as being certified as a minority business, and theres a federal certification, New York City has its own certification, New York State has its own certification, the Port Authority has a certification. How much time can a small business person spend on getting the certification? Its like if a student had to take a different test to apply for every college, I think thats going to be pretty difficult. From my perspective, what Im hoping is that if a role in the federal or certain government agencies can take a role in terms of helping the small business people so that they can spend time doing the business rather than filling out paperwork. And beyond that, I also look at that SBA has certainly done a lot of great work for small business, but its not the only agency in the federal government. The Department of Labor has a small business department, the Commerce, State Department has a small business department. So, theres a lot of different federal assistance and services for small businesses its there, but its for us to look for. Thank you.
Jonathan Bowles: Thank you everybody. And, Fred, I think thats important to really focus on the fact that there are so many good SBA programs. I think, and part of my first question is, that I think a lot of people here in New York arent aware that there are technical assistance programs, and I know someone mentioned Joyce Moy and the work that Small Business Development Centers do around the city and throughout the country is very important. But I want to come back to this because something I here time and again. Weve had several conferences here about entrepreneurs, small businesses, Ive gone out and interviewed countless of them across the city, and I always hear: access to capital is such an important issue. And these government-backed programs like the SBA helping the banks do their job and make more small business loans, does that remain for all of you that are working on these issues, is that government-backed subsidy from the SBA, is access to capital still a major problem, and if so, do some of these cuts really hurt the ability of SBA programs to make these loans?
Fred Teng: From my perspective, I think that for every business, the most important thing is managing the cash flow. If you have the cash flow to prove it, then, in terms of accessing the capital and the ability to repay those borrowing funds. Also, I dont know if borrowing is the only way or the best way to really grow a business. Sometimes we need to share, in terms of giving away equity shares so that if the business doesnt work out, everybody gets to take the burden and also not just one individual or one company. So, I think that the just the borrowing itself is not the only thing.
Fred Hochberg: My sense is that, during the Clinton administration, there was taxpayers provided a small subsidy to make small business loans, on the order of about a dollar for every hundred dollars worth of loans, was what taxpayers subsidized. The small business owners paid for the rest. Its now zero, so therefore, the small business owners and the bank fees which get back to the small business owners are paying for the entire amount. Whats still perplexing to me is, since theres no federal subsidy, why the federal government has also put a cap on the total amount of loans that can be made to small businesses, since the federal government is not expending one dime to do so. So, I dont really understand why put a ceiling on it when its not costing the government any money.
Eric Gioia: Id like to make a few points. Jonathan, you mentioned that I grew up in a small family business. Actually, yesterday was Valentines Day, the flower shop was quite busy. My grandmother was 86 years old yesterday and the way I got out of the family business Im allergic to flowers. So, she still doesnt believe me quite yet, but I really am. But what I did when I was elected to office, I went around the district and I continued to have these small business forums and Joyce Moy has actually been very helpful in setting them up. When small business owners come together, they talk about some of the issues that Fred touched on succession, access to capital, many different issues. And access to capital does come up time and time again. But something else comes up, and Fred mentioned that as well. And that is part of what government has to do is create a fertile atmosphere where businesses can grow. And this is really both at the local and federal level.
Right now and some of you may know this if you want to open up a restaurant in New York City, you have to fill out eight different applications from four different federal and state agencies. And, so, what you find is, as an entrepreneur whose goal should be to wake up, make your business better and put food o the table, is that instead you have to become a navigator trying to get through some of the most complex red tape and bureaucracy that youve ever imagined. And that shouldnt be. Im proposing, in the City Council, two things one, a master application to open a restaurant, and, two, Im proposing a One Start center thats actually worked very well in San Jose, where a small business can go in. Notice I say One Start and not One Stop, because thats the point it shouldnt be where youre stopping but where youre beginning. And those are two small initiatives that have worked in other places in America, I hope will work well in New York.
That comes to my second point, and thats the role of the federal government. I am not one to diminish the importance of presidential rhetoric. I was reading a book last night about John Kennedy and the arts, and it wasnt so much that he put money there but that he talked about it and he said that a president could talk about it, and this was a way to lift the American spirit. So Im a big fan of presidential rhetoric and I think it matters and Im happy when President Bush talks about the ownership society. But there comes a point when, as a public, we need to be so demanding, and say: listen, you need to match your deeds with your words. And when youre slashing the Small Business Administrations budget by what amounts to almost 50% over an administration, youre not putting your money where your mouth is. And while we have to recognize fiscal realities and we have to make more with less, I mean, listen, you invest in what you care about, you invest in what you believe in and if youre not putting the money there, youre not going to get the same results no matter how hard we work at a city and state level. And what Id like to see from the city and state governments is incentives to make these master applications, ways that best practices across the country are being identified in these little laboratories for democracy, and then passed out and shared, state-by-state. So those are two way that I feel the federal government could be hugely helpful to New York City, in my role as a local leader.
Michael Pappas: Lets talk about results. Well talk a little bit later about the subsidy, which is pretty understandable. But in the fiscal year 2000, the SBA we have two main loan programs: 7(a), which is working capital, those who want to start a business or grow a business, and then the 504, which Madeline is one of the folks here in New York that help promote, its called the 504 for real estate or fixed assets. In New York City, the five boroughs, not the New York district, which Jose is responsible for, which is the 14 downstate counties, New York City, the five boroughs, fiscal year 2000 1,014 loans. This is a combined of working capital as well as the real estate fixed assets 1,014 loans for a dollar volume of $172,746,000. Its a significant number. Fiscal year 2004, which ended September 30th 2,044 loans, for $238,777,000. I dont have statistics for this fiscal year, as of October 1st, but I will tell you were on track to go beyond even what we did in the last fiscal year. I think Jose said that in his district, its probably not the city but his district, hes looking at a 70% increase over last year. And that is with this new subsidy model.
Let me talk to you about what occurred there. Part of what we experience as a federal agency yes, the President and his administration submits a budget to Congress, they review it, modify it and then approve something and then the President either signs it or negotiates with them. Part of the challenge and some of our lenders and the gentleman from Citibank will probably attest to this is when the Congress does not approve a budget before October 1st, which is the start of the fiscal year, they approve whats called a continuing resolution. And what that is, is a portion of the budget from last year, taking a certain amount lets say its going to be for two months worth of the budget for all federal agencies, or in the case of the SBA, its usually only 80% of the same period of time, the budget covering the same period of time in the previous fiscal year. So, when a Congress doesnt approve that, we have to live within the constraints of the budget, portion of the budget thats contained within that continuing resolution. And part of the reason for the proposed change to what Mr. Hochberg referred to as a zero subsidy is it didnt refer to the 504 program, but it applied to the 7(a) program that because there was a subsidy and it was not a freestanding program as the 504 program is, and because the growth of the program has been increasing exponentially, and because of that subsidy that existed, we had to impose caps.
And at one point, the last fiscal year, the last couple of years, the administrator had to actually close the funding, the 7(a) funding, because we had run out of money within that period of time. And the lenders that we interact with, and certainly the small business people, but primarily we heard from the lenders, to say that thats not a good business practice to have a program that starts and then stops and you impose a cap, and yet we were constrained because of the continuing resolution, because we didnt have our full funding level. So, during the course of the fiscal year, proposals were made, the administration put forth a proposal to Congress which has subsequently been approved, that eliminated that subsidy. Which, from the administrations perspective, is important because the taxpayer is potentially experiencing a greater cost, and yet by our statistics, and certainly in the last fiscal years that Ive mentioned but certainly even in this fiscal year, since October 1st, without this subsidy, the program continues to grow. We believe its important to always strike a balance. Where that line is drawn as to whats an appropriate level of federal subsidy is where people will differ.
And this President and this administration has proposed and the Congress has approved a model that would lessen the exposure of the taxpayer and the cost of the taxpayer and at the same time has seen a growth in the program. And I would venture to say that during this year, we will, towards the conclusion of the fiscal year, that will be studied and we will determine and have interaction with our customers, with our lending partners, as to what their experience is with that, and try to always improve, tweak to ensure that were being as effective as we can within the constraints that we have. And, yes, operating expenses have gone down, but, you know, coming from the private sector myself, and having been involved in other levels of government, we always have to make decisions and set priorities. And again, as I said in my opening comments and in response to the first question, focusing on results is something that weve been directed to do. The results are very, very clear in that we are helping more small businesses here in New York and around the country at a lower cost to the taxpayer and we think thats a good thing.
Jonathan Bowles: Let me ask Madeline as someone who is out there working with the small businesses, as a lender Ive heard out there, Ive talked to lenders and some of them are frankly concerned about the higher fees and without the subsidy, theres a reliance more on the fees for these programs. Can you explain how does that work to try to make the loans? Is it a problem, is it making it harder to do more loans?
Madeline Marquez: Well, let me first address the access to capita issue. I think that has been an issue my entire career, and Ive been in the lending business for over 25 years. Businesses always, are always, always going to need capital. So the access to capital issue will always exist, in my opinion. Second, I think the access to capital issue is not only an issue of the federal government. I think its an issue of the banking industry as well, and the different products that they need to create to address that issue. Some banks have addressed the start-up issues. Some banks have addressed the businesses that are in existence from one to two years, and other banks have addressed the businesses that are in existence from three years and up. So, whether you are a startup or whether youre an existing business, there are some programs out there that may address the access to capital issue.
As it relates to the SBA lending programs and the fees associated to that, the 504 program, all of its fees are financeable, meaning theyre included in the debenture when it is sold at market. Meaning that the business has the ability for depreciating their asset that they just acquired, whether it be real estate and/or equipment, they can amortize these fees for the same length of the loan. So, its not an issue, as it relates to the 504 program. There are fees I mean, theres an underwriters fee, theres an SBA fee, theres a CDC fee, theres a fee of fees just joking. But, there are fees that are financeable, so I think as it relates to the 7a program, there are also fees associated to that. Im not quite sure if those are financeable, Michael, but I know that within the 504 program, they are.
Yes, fees are an issue. Banks also charge fees 2 percent of whatever the origination costs are its all inherent in doing business. Thats how banks make their money. While its a zero subsidy program, meaning that the federal government does not have to spend one dollar to operate the 504 program it operates itself there are still fees associated and thats why they pay those fees so it can still be a zero subsidy program.
Jonathan Bowles: Well, you know, Michael mentioned some really impressive statistics about overall SBA lending increasing and the number of businesses getting them. But, let me ask about another kind of lending initiative. And I know, Fred, under the Clinton administration, one of the initiatives that President Clinton started was the CDFI fund, which is a program that I think helps a lot of very small businesses. It does a lot of things with community development, but one of the things it does is it puts money into micro-enterprise lending programs, people that maybe would not qualify for some of the traditional SBA backed loans.
That program, I think, around 2000 was up to around $115 million, $120 million a year. The current budget proposes to cut it from about $55 million to about $8 million, I believe. The SBAs microloan program, which I know from talking to people at the SBA district office in New York, has been increasing just like all the other programs, I think last year made somewhere in the vicinity of about 150 microloans. And I think theres 3 SBA-backed microlenders in New York City. We hear time to time at the Center for an Urban Future about a lot of immigrant-owned businesses, very small entrepreneurs, and these are the kind of things they talk about. So, Im just curious a lot of the initiatives that seem to be cut in this budget and maybe have been seeing a decline over the last several years are for these very small businesses, these microenterprises. Is that particularly tough to swallow in a place like New York?
Fred Hochberg: You mentioned earlier, Jonathan my mother started her business, Lillian Vernon, in 1951 with $2,000 in money my mother and father got as wedding gifts. And that $2,000 grew to a company that was on the stock exchange and one of the fastest growing direct marketing firms. So, I understand, growing up, what a small amount of money does to grow a business. And these microloan programs, they are expensive. Theres no question about it. Theyre not cheap, because youre taking someone who has an idea, does not have a credit history, may not even have a checking account at that point, and youre really banking on them. Youre really almost giving them equity, because youre giving them small amounts of money to start a business.
A lot of these businesses were home-centered, like the business that I grew up with. A lot of them, when I was in the SBA, about a third of them were home day care centers where, frequently, more often women, frequently minority women started a home day care business out of their home, where they would take care of five, six, seven, eight kids in the neighborhood, and thereby help six or seven other families go to work and keep a job. So, theyre expensive in a nominal way, but Im not sure theyre expensive in terms of the fabric of the city. And we found, particularly in examples in San Francisco when I was there, that we partner with local banks because ultimately we made these customers credit-worthy that a major bank would then lend them money.
So, in the spirit of full disclosure, Im also on the board of Seedco, I see Diane is in the front row here, wave your hand has picked up the slack for a lot of these kind of small loan programs. I think they really are essential and I think that youve got to take a longer-term view than a year-to-year nominal budget perspective
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they dont know if their English is good enough to go into a bank, and so these programs really do strike a very responsive chord, a very much needed chord.
Jonathan Bowles: Anyone else?
Madeline Marquez: I think micro-enterprises are going to, if I can use this expression, get the short end of the stick. I think theyre the ones that are going to be the most impacted. While there are programs that exist out there, the microlenders take the highest risk, as well, and its because that they take the highest risk that the fees are high. I think theres an underlying issue as it relates to a startup company that we need to also address, and thats an education issue. How prepared are they, truly, to go to a microlender and establish themselves as a business and get all of the resources that they need? Besides the Small Business Development Centers that are out there that address this issue, I get hundreds of calls a month, well, were right in the Bronx, and what we tend to do is we developed, Im sorry, Im jumping all over.
We developed a technical assistance manual. We had to. As a result of all of the calls that we were getting and ourselves trying to understand the lay of the land as to who was doing what for the small business community. We had to identify those lenders that had microloans. We had to identify those entities for-profit or non-profit entities that had resources that are available for the small entrepreneurs and, then, how to get them all together. How do you know where to refer a small entrepreneur when they call you and ask you for information, so that you dont just jump them all the way around and take them to where they really need to go. So, we developed this technical assistance manual. I know that the city has one, I know the state has one, we all have one that highlights all of those entities that are in the New York community, and I suggest that you get your hands on one of them.
But, it highlights who does what, and I think that an education level for that small entrepreneur is also very essential. A lot of times, the microlenders take the highest hit in terms of their monies being lost, because that education level has not been included in there. Some microlenders make it a condition of the loan that they provide that that entrepreneur take additional entrepreneurship classes and stuff like that, to make sure that the success rate improves, because lets face it, its those first two years that are critical. Under the 504 program, were allowed to do startups, but I still have not encountered an entrepreneur that is starting up, that has all the documentation in place, that is as sophisticated as an entity that has been in business for about a year or so, that we can feel comfortable in lending.
Jonathan Bowles: So, do you encounter a lot of businesses that you think well, maybe this is a business that can work, but you just cant take the risk?
Madeline Marquez: Right, and also the program under which that I have, for lack of a better word, restricts me from trying to lend to them, only because my minimum is $50,000 and that has to be 40 percent of a project. So, in other words, someone coming to me has to be needing at least $150,000 so that my 40 percent can go in there with the bank and then ten percent equity. But when it comes to a startup entity, the equity contribution increases, to 15 to 20 percent, which is the common percentage across the industry. The riskier the venture, the more the entity. We have done startups. I have done one. It was a medical facility and Ive done another one that was considered a startup. And then that phrase, startup, is another issue that we have as lenders. What is a startup? A startup could be a company that has zero months in their operations to a company that has been in existence for less than three years. So, the range is also fairly vague, in terms of what a startup is.
Jonathan Bowles: Michael, you made a pretty compelling case about the lack of a subsidy for the major programs like 7(a), with the results that you mentioned. When it comes to these microenterprise programs, a lot of them seem to be slated for elimination under this budget. And the other one, the CDFI fund, which isnt part of SBA, I guess, thats being cut severely. Whats the rationale behind these kind of cuts to the microenterprise programs?
Michael Pappas: Again, the focus on results, trying to balance costs versus results. I heard a study that was done by our office of capital access, that for every dollar that was lent under our microloan program, it cost us 97 cents. Thats very expensive. For the agency as a whole, nationwide, its roughly 2,000 loans were the goal for the fiscal year. It is a small program but certainly not small for those that could benefit from it. I recognize that, we recognize that. Through the existence of the microloan program, again things have changed the private sector lenders, I believe, just based upon our results and our 7(a) lending, have begun to do smaller loans. There are a couple of entities in particular that are focusing on $5,000 loans, essentially even less.
They are viewing it, because of the level of sophistication that people that are entering business are demonstrating, the technical assistance that is available to them under our programs that I mentioned earlier, as well as others. Training and technical assistance is available. Ill throw another statistic again, out of the New York district, the city plus the other counties in the last five years, weve seen more than doubling of the number of training and counseling sessions or businesses that have helped, from 41,000 to over 81,000 individuals. And people are becoming more connected to the services that are available. So, again, it goes to the analysis of cost and what are the other options. And, as I said, the lending community from the private sector has seen these individuals as credit-worthy, as maybe better and better risks, and so they are stepping in where maybe they hadnt stepped in when the microloan program was initiated.
Eric Gioia: Let me just add to that. I believe that microlending is very important, and, actually, after listening to Michaels answer, I believe that its even more important for there to be a government role. If those numbers are right, and I have no reason to believe that theyre not, at 97 cents for every dollar, those are pretty high costs. And, to me, that speaks to a government need to be in there, because I dont think the private sector will step in to fill the gap. And its important when you think, especially of a city like New York, a city that has so many new Americans, people who are foreign-born, people who are not speaking English as their native tongue. And when you keep in mind, I think its 98% of all businesses in New York City have fewer than 100 employees, and overall, those small businesses employ two million New Yorkers. Now, businesses are high right now, but when you compare the numbers from 2000 to 2003, the number of new businesses has actually declined. I believe its 2.7 percent last year, its gone down. Now, thats a bad thing for New York Citys economy, its a destabilizing factor for New York Citys economy, and I think I would argue that making these small amount of capital the $2,000 to Freds mom and dad that they used their wedding money for I dont think you could have a more eloquent example of how a small amount of capital can have an incredible ripple effect through the entire economy. And, to me, thats why theres an important role for the government to play. Where the private sector will maybe not see the small profit margin, but in the aggregate, a government role will give you an incredible jolt to an economy.
Fred Teng: I just want to add real quickly, I think that when Fred mentioned his parents invested their $2,000 to start their business, I think that still holds true today. I believe that businessmen should invest their own money into the business. If they sell a car, if they put their house on a mortgage, if they borrow from their friends and family. Unless they feel this is totally their stake, because they have everything to gain when the business is successful. So, I think that while microloan and all these ideas are good, the business people have to be putting 100% of their own stake into their business.
Jonathan Bowles: I want to now, were going to go to questions from the audience in about five minutes, but I want to ask these cuts are on the table. As Fred mentioned, there have been cuts over the last several years, amounting to about 40 percent in the overall budget of the SBA. Theres proposed cuts for the Community Development Block Grant program, and others the MEP program, I see ITAC, Sara Garretsons here today. What can local policymakers do? Are there things that city government, state government can do to help pick up the slack? Obviously, Eric mentioned that small businesses are important 98% of all businesses are under 100 employees. At the same time, I recently saw statistics that show that, I think, over 30 percent of all businesses in Queens, Brooklyn and the Bronx, are microenterprises, with under five employees. So, given how important small businesses are to the local economy, is there a more important role that the local government should be playing?
Eric Gioia: Let me start off Ill tell you some of my ideas and then Im happy to hear suggestions on what local government and particularly what I can be doing to help small businesses across New York City. The short answer is, yes, I think theres a huge role for local government to play. What Ive done is try to get some of these small micro-businesses, you get people, whether pick the Roosevelt Avenue, Greenpoint Avenue commercial strip. You have hundreds, I mean hundreds and hundreds of small businesses. To try to get them to see, whether youre selling shoelaces or selling flowers or youre a delicatessen, you actually have a huge common interest. And government can then steer in that function no government money, but to get them to say: lets get together, lets form a group, lets meet once a month, lets see whats on each others minds. And then maybe with some investment from the public sector and then some investment from the private sector, well bring the Doe Fund in. Does everyone know what the Doe Fund is? You see them in these bright blue uniforms, they cleaned up Union Square and other areas. So, we did that in Queens, along Roosevelt Avenue. And, now, Roosevelt Avenue is cleaner today than, Ill tell you, its ever been in my entire life.
And that matters to a small business owner, because when you have clean streets, all of a sudden youve got more foot traffic and people are going to your store more often. The business owners banded together and weve begun to fight graffiti like its never been fought before. I thought it was really great this one guy came out of his delicatessen, this graffiti had been on the side of his wall for, really, as long as Id ever seen the delicatessen there, and this group of people cleaned it off. And he came out, and he said can I give you $500? Now, $500 is a lot of money to a small business owner, but it was worth it to get the graffiti off. And, so people are willing to put their hands in their pocket when they see a direct result.
And I think one of the roles that government can do is get these people to overcome superficial differences to see a huge commonality, of not just values, but of economic interest, and have them row in the same direction, toward cleaner streets or fighting graffiti, or just forming that business association or BID, by the way. In Long Island City, weve just gotten off the ground a Business Improvement District, which I think as everyone knows, businesses agree to pay more money to actually provide better services. Were trying to get a second Business Improvement District off the ground, as well, now in Sunnyside. So thats, I think, in the very small level, what you can do to try to get people working together.
On the larger level, I think its important that we really begin to cut through this red tape, this bureaucracy and introduce new ideas like the master application or the One Start center. And I think what it is, really, its almost a zeitgeist shift in government, in that we need to almost think of ourselves as entrepreneurs. When youre in a small business, you care about adding value, you care about making money, you care about making your government work more efficiently. All too often, in government, both at the local and at every level, frankly, its about status quo and its about turf and its about protecting whatever area that youre in. And I think what has to happen like the restaurant example that Ive said is that government has to start thinking: how can we make peoples lives easier in terms of starting this business, so they can actually focus on what theyre in business to do?
Ill give you one final example about how we really need to have this shift. Roosevelt Avenue if anyones ever taken the subway out to see the Mets play or the tennis Open, you know Roosevelt Avenue well. The 7 train is over it. The 7 train is a magnet for pigeons. And, as a politician who stands in front of subway stops quite often, shaking hands, I will tell you that pigeons can be very problematic. And the business owners, it drives them crazy, because the truth is, it decreases the foot traffic. People dont want to walk along Roosevelt Avenue if youre going to have to dodge pigeons. So I complained about this to the MTA and to the Sanitation Department. And I started getting phone calls from the small business owners who called up, and they said: did you complain about this? And I said, yeah, I did. And they said: well, theyre writing us tickets. And I said: what do you mean theyre writing you tickets? And they said: well, were writing you tickets because the ground is soiled. And I said: so theyre blaming you for the pigeons? And they said yes. So it took a day of phone calls to stop the actual ticket-writing. But, to me, this is government at its very worst, right? If you put the 7 train up, we bring the pigeons, the pigeons do their business, it decreases small business and then we punish the small business owner for not getting rid of the pigeons.
And, so, to me, thats what government has to do both, locally, get people to steer in the right direction; two, come up with better programs that actually cut the red tape, and three, really have this mentality become more pervasive that government should be here to help and not to hinder people out there who are trying to make a buck.
Fred Hochberg: I would just add as someone who ran a business for 20 years and from my time in government, most important is really a trained and educated workforce. So, the state and local government, which is where education happens, that is central to providing a good business environment. If we have trained and educated workers in New York, businesses will grow here, businesses will come here, businesses will start here and theyll flourish here.
Additionally, you need confidence and optimism. We have to really build an optimistic, forward-thinking view towards the city that makes people feel inclined to start businesses here, to visit the city, to be tourists. The Gates in Central Park, I went up there on Sunday, and I started to take a taxi, which was a mistake, and the cab driver complained to me about: this damn thing in Central Park, theres traffic, I cant get so I said, well, I thought they were kind of nice, I liked the Gates in Central Park. I then took the subway, it was a lot faster. But, the point is they brought a lot of people to New York. So, I think, first and foremost, what government really can do is create the environment, create the environment in education, create the environment in terms of a trained workforce, create the environment in a sense of optimism, coto hire an additional employee and certainly from an estate tax perspective, can allow a family-owned farm or business to be passed from one generation to the next. All very, very critical.
Two other points that I think are important. Health care has not been mentioned yet today, yet is very critical for small businesses and their employees and their families. It continues to increase. The administration again has a proposal to try to help make health care more affordable. This is something that has had success in its approval in the House of Representatives, yet to be approved in the U.S. Senate. And, again, members of the Senate could be educated in the small business persons perspective on that.
And the last thing that were particularly proud of for the SBA, is one thing that I havent spoken about today, is government contracting. The U.S. government is the single largest purchaser of goods and services in the world, and not just the United States. And the SBA has a division called Government Contracting and Business Development, and their focus is to try to help people gain access to government contracts. Thats one of their focuses. And our administrator, Hector Barreto, when he came on board, felt that the very good efforts that have been made in the past and having a once-a-year procurement conference where federal agencies are brought into Washington and small businesses are invited to meet them and try to make a connection with the procurement official and try to gain access or get on a bid list for a federal contract weve expanded that. Weve partnered with some organizations and companies and we have what we now call business matchmaking.
And weve had these conferences all around the country, have several scheduled for this year, as well, where small businesses can go online and complete a profile indicating who they are, what theyre selling, whether its a good or a service, and a federal agency or, in this case now, a large corporation, because weve included large corporations, can complete yet another profile and indicate what good or service theyre trying to purchase, and we try to match two. We do so, now were trying to do something, were doing virtual business matchmaking, doing it online. But the last year or so, what weve had is events where weve literally had thousands of people converge in a conference center, and we actually schedule at least three appointments for that small business person to meet with at least three a procurement official, not just representative whos there at a big trade show and passing out a brochure and taking someones proposal, but theres actually at least a 15 minute appointment that is scheduled, that takes place.
People meet face-to-face, and just some statistics