Small Business Lending Fund Act of 2010--Continued

Floor Speech

BREAK IN TRANSCRIPT

Mr. GRASSLEY. Mr. President, we have the Small Business Jobs Act of 2010 before us. For more than a year now, the mantra of my colleagues on the other side of the aisle, meaning the majority party, has been: jobs, jobs, jobs.

Unfortunately, the only jobs the policies of my colleagues on the other side of the aisle have created are government jobs. The legislative fixes proposed by the other side have fallen short in creating private sector job growth.

I have a chart here that will show unemployment reaching a high of 10.1 percent in October 2009. The administration promised that unemployment would not go above 8 percent if we enacted their $800 billion stimulus bill. Moreover, they asserted that 90 percent of the jobs would be in the private sector. The unemployment numbers have come down from their high in October, but this has not been the result of a robust hiring in the private sector. To the contrary, many people are simply no longer counted as being unemployed because they have stopped looking for work. For those who did find work, many found work with the U.S. Census Bureau helping to complete the 2010 census. The unemployment rate reached a low of 9.5 percent in July but once again has ticked up to 9.6 percent as 114,000 temporary census jobs ended. While those who put their faith in the stimulus package believed that this summer would become known as ``recovery summer'' due to all of the stimulus projects underway, it actually has ended in what a National Public Radio story termed as an ``economic pothole.''

To be fair, the private sector employment number has inched up slightly in the past few months. For August, the Bureau of Labor Statistics reported that private sector employment payroll edged up by 67,000. However, the problem is that around 150,000 jobs need to be added each month just to keep up with the growth in population. So basically, by adding 67,000 jobs, we are treading water too slowly to keep our head above water. Moreover, as pointed out in the September issue of the National Federation of Independent Business Small Business Economic Trends, 45,000 of those 67,000 private sector jobs were in education and health care. These jobs are heavily dependent on government spending, and that means these are not typical small business jobs on Main Street.

It is clear, however, that the small businesses remain pessimistic about the economy and are hesitant to hire new workers. According to the National Federation of Independent Business's most recent survey--and we have a chart here on this point--a net negative 1 percent of business owners plan to create new jobs in the next 3 months. A net negative 8 percent of business owners expect the economy to improve. Only 4 percent of the business owners said it was a good time to expand. A net negative 30 percent of owners reported higher earnings. This last component is especially important for businesses when it comes to hiring new employees since businesses need to know that revenue generated from an additional employee will exceed the costs.

Given the current unemployment rate, it is not surprising, then, that we are once again looking at ways to create jobs. Hence the bill that is before the Senate. The question remains: Are we going to continue to look to the government to be the job creator or are we going to realize that job creation
and real economic growth comes from the private sector? This question also brings to mind that government doesn't create wealth; government consumes wealth. So if we are going to increase the economy in this country, it has to be done through the private sector.

The bill before us appears to recognize the importance of the private sector--in particular, the importance of small businesses and entrepreneurs in getting our economy back on track and getting the employment numbers to move in the right direction. I have been beating the drum for some time now that if we want to get our economy back on track, we need to focus on small business. After all, small business is responsible for creating 70 percent of the jobs in our economy. That is not a Republican percentage put out there by my party. That is also a figure I have heard the President of the United States, our President, say in speeches as well--70 percent of the new jobs are created in small business.

During the debate on the $800 billion stimulus bill, I pointed out that it contained too little in terms of provisions aimed at small business. In all, less than one-half of 1 percent of the stimulus bill was tax relief for small businesses. Unfortunately, my concern that the stimulus bill provided too little relief to small businesses has proved correct. Since the stimulus bill was signed into law, small businesses have been hemorrhaging jobs. According to the ADP national employment data, since the stimulus was enacted, small businesses, which are those defined as fewer than 500 employees, have lost a net amount of 2.6 million jobs. During this same time, large businesses, which are those with over 500 employees, lost a net amount of 716,000 jobs. According to this data, small businesses have accounted for nearly 80 percent of the decline in employment since the stimulus bill was signed into law.

With the consideration of the small business package before us today, I hope this body is finally starting to get serious about tracking unemployment through a true jobs bill. Compared to previous stimulus or jobs bills promoted by the majority, this small business bill has a rather modest cost, with tax provisions totaling about $12 billion. It is targeted at job creation by providing small businesses with incentives to invest in new equipment, expand their operations, and ultimately hire new employees. The bill includes provisions that would encourage small businesses to invest in new equipment and real property by increasing the amount of capital expenditures small businesses can expense. For equipment, the amount that can be expensed is increased to $500,000 and for real property, to $250,000.

Moreover, it encourages investment by providing additional first-year bonus depreciation. It promotes entrepreneurship in another way by increasing the amount allowed as a deduction for startup expenditures. It increases access to capital by allowing 100 percent of gain from investment in qualified small business stock to be excluded from income. It also takes the general business credits out of the alternative minimum tax for those sole proprietorships, flowthroughs, and nonpublicly traded C corporations with $50 million or less in annual gross receipts. Another way is increasing access to capital by extending the 1-year carryback for general business credits to a 5-year carryback for small businesses.

Finally, this bill promotes small business fairness by limiting harsh penalties that have been imposed on small businesses by the IRS and equalizing the tax benefits for health insurance that self-employed individuals may receive to those received by employees.

In regard to the Small Business Administration provisions, I strongly support many of the bipartisan provisions included in the bill. This legislation would increase small business lending by lowering small business loan program fees while at the same time raising loan guarantees and lending limits. Specifically, this bill extends the fee reductions and eliminations for the Small Business Administration's 7(a) program and 504 program and the 90-percent loan guarantee limit for the SBA's 7(a) program. I am pleased that these well-established, effective measures have been included in the bill. Raising the 7(a) guarantee rate and reducing lenders' and borrowers' fees in the 7(a) and 504 loan programs has been enormously successful. These modifications, which expired in May, have led to a significant increase in lending capacity and access to capital.

I am a supporter and, in fact, have been a leader of the many bipartisan small business provisions in the current small business package. I am an original cosponsor of S. 3604, standalone legislation introduced by Senator Snowe, the ranking member of the Committee on Small Business and Entrepreneurship, which would extend the same Small Business Administration lending provisions that are in the bill currently before the Senate.

Additionally, many of the small business tax incentives included in the small business package were taken from legislation I introduced last year entitled the ``Small Business Tax Relief Act of 2009.'' Of course, there are differences and additional provisions I would have liked to have been included, but, as with any piece of legislation in the Senate, there is a need to compromise if you want to get anything done. My bill generally would have made the small business tax provisions permanent law. I believe this would have provided small businesses with certainty and promoted job creation over the short run as well as the long run. However, the Senate small business package generally only makes the tax provisions applicable for 1 year. That gets us back to the point that the word ``uncertainty'' crops up so often when used by small businesses as well as big businesses--the uncertainty of what Congress is going to do or the fact that when they make policy, they don't make it for a long enough period of time.

That word, ``uncertainty,'' is the one reason jobs are not being created. It is kind of a sin that Congress would bring about this sort of uncertainty--or maybe the executive branch of government is bringing about some uncertainty--when, in fact, corporations have a historically high amount of cash just lying around. The last figure I saw was $2.1 trillion, and with $2.1 trillion, one would think there would be a lot of jobs expanded, except the people who could do it don't know what Congress is going to do to them next, so they are taking caution. Well, if we could reduce that caution and encourage them a little bit by letting them know what we are doing over the long haul, it would go a long way to getting this unemployment down.

Getting back to what I said, I would have liked to have seen in this bill an additional provision from my bill included in the final package. This provision would have provided small businesses with a 20-percent deduction off of their small business income. It is unfortunate that this provision was left out. This was the largest and most important provision of the bill I introduced in the summer of 2009.

However, in all, the tax provisions included in the Senate small business package provide real relief to small businesses. They generally have the support from Members on both sides of the aisle. In fact, you would have thought this small business bill would have been a slam dunk. However, the Democratic leadership has used the small business bill as a political football, scoring political points. The majority leader refused to allow the small business bill to be considered under regular order. The majority leader filled the amendment tree, thereby limiting amendments that could be offered. The Democratic leadership and the administration then proceeded to blame Republicans for blocking relief for small business. This is despite the fact that the Democrats were unable to get their own Members in line on the small business package. It still remains unclear whether the Democrats in the House, with their large majority, will pass the small business bill should it pass this body.

Moreover, the waters of the small business package were further dirtied by the inclusion of a controversial lending provision that would create a $30 billion lending fund. This fund is designed to provide billions of taxpayer dollars to banks for the purpose of making loans to small businesses. To me and to many experts, the fund resembles the TARP bailout program, which has been badly mismanaged.

Elizabeth Warren, head of the TARP Congressional Oversight Panel, expressed skepticism that the fund would be effective in increasing small business lending.

She stated that:

Such a fund runs the risk of creating moral hazard by encouraging banks to make loans to borrowers who are not creditworthy.

The Special Inspector General of TARP stated that:

In terms of its basic designs, its participants, its application process, and perhaps its funding source from an oversight perspective, the [small business lending fund] would essentially be an extension of TARP's Capital Purchase Program.

There is also disagreement about the cost of the program. Proponents argue that the lending fund will raise $1.1 billion. However, the Congressional Budget Office has indicated that if you score the fund on a fair value basis, the program would score as a cost to taxpayers of $6.2 billion. The Congressional Budget Office has indicated that the fair value basis is a more comprehensive measure of the cost than estimates done on a cash basis.

Many Members in this body voted for the Emergency Economic Stabilization Act in 2008 because we were led to believe our economy was on the brink of failure. We were told the Treasury Department would purchase toxic assets. But after its passing, the executive branch changed course and picked winners and losers. Where? Not on Main Street but on Wall Street.

We should not be fooled again by the same officials at Treasury who have mismanaged TARP and have been less than transparent with the American people about how the taxpayers' money has been spent.

I compliment my friend, Chairman Baucus, for diligently pressing the tax provisions in this bill. There are many good things in this bill, but I believe it could have been better. Unfortunately, the Democratic leadership is more interested in scoring political points than actually providing relief to small businesses. If the majority was actually interested in passing small business relief, a small business package could have been put together that would have garnered 80, 90, or more votes. But instead the majority leader filled the tree, prohibiting amendments being offered to improve the bill.

The small business fund in the bill just doesn't have the safeguards in place to ensure that recipients are creditworthy or that taxpayers may be made whole in the end.

Should this bill be signed into law, I will do my part to make sure the implementation is in the best interest of the taxpayers as well as small businesses.

WATCH-DOGGING THE WATCHDOGS

Mr. President, I want to speak about watch-dogging the watchdogs.

I first started watch-dogging the Pentagon in the early 1980s, when President Reagan was trying to ramp up the defense budget. A group of Defense reformers were examining spare parts pricing. We found the Pentagon buying a $750 toilet seat and $695 ashtrays for military airplanes.

That experience taught me an important lesson: If you are going to watch-dog the Pentagon like the inspector general, or IG, is supposed to do, then you better sharpen your wits and have the tools of the trade ready.

One of the most important oversight tools is the simple tool of the audit. The audit is the IG's main weapon for detecting and reporting fraud, waste, and theft. Mr. President, I am sad to report that the IG's Audit Office at DOD is not ready to tackle fraud and waste. The lack of IG audit readiness comes at a time when aggressive audits are sorely needed.

Secretary Gates recently announced that he wants to cut $100 billion in wasteful spending. But he is relying on the Pentagon bureaucrats to eliminate it. Asking those who created the waste in the first place to then turn around and get rid of it is not a good plan. He needs a better mix of weapons. To win this declared war on waste, Secretary Gates needs the independent backup from the IG. Unfortunately, the inspector general's Audit Office is AWOL doing policy audits instead of financial audits.

Policy audits are not known for exposing waste. Last year, I received a series of anonymous letters alleging mismanagement and low productivity in the IG's Audit Office. This is a huge Audit Office. It has 765 auditors and an annual budget of $90 million.

In response, I and my staff conducted an indepth review of all the pertinent issues. That oversight report was just completed, and I forwarded it to Secretary Gates with recommendations within that report for corrective action.

My oversight should fit right in with Secretary Gates' plan to cut waste at the Defense Department. My people in Iowa are aching for some commonsense fiscal policy in Washington.

My oversight report puts the spotlight on a good starting point. That oversight report indicates this vital piece of inspector general oversight machinery--the important tool of the audit--has been disabled. It is broken, leaving hundreds of billions of tax dollars vulnerable to fraud, waste, and abuse, outright theft.

The status quo is totally unacceptable. The IG's audit machinery needs to be brought back up to standard.

IG Heddell needs to hit the reset button. He needs to refocus the audit effort on priority areas consistent with the inspector general's core mission, which is to detect and report fraud, waste, and abuse.

The problem identified in my oversight report is twofold. The first big problem is the broken Defense Department's accounting system. That system is incapable of generating accurate and complete financial data.

The success or failure of an audit turns on the quality of data available for that audit. Unfortunately, the quality of Defense Department data presented to auditors should probably be rated as poor to nonexistent. The consequences are then predictable. Auditors consistently report ``no audit trail found.'' But what does ``no audit trail found'' mean? It means critical supporting documentation and data are missing. Vital records are not available for audit. Money has been paid out but for what? When there is no audit trail to follow, that question gets no answer.

The ``no audit trail'' finding is like a bad toothache that doesn't go away. The IG's own audit manuals warn that a ``no audit trail'' scenario is a red warning flag. It is a very common indicator of fraud. So we have clear-cut indicators of fraud that show up in one IG report after another and, do you know what. Nothing seems to happen. It is like the IG is howling in the wilderness. There is no followup, no corrective action.

Why is this being tolerated? How many more times does the IG need to be confronted by such obvious signs of fraud before decisive action is taken?

Maybe next time the auditors can't find an audit trail on a big contract, they should ``lock the doors and call the law''--just drop a net on the place and call for backup.

This brings me to my second audit issue. The IG's Audit Office has allowed itself to be buffaloed by the ``no audit trail'' scenario. It just backs off and rolls over instead of attacking the problem head on with solutions.

The heart and soul of my financial oversight operation is a contract audit.

In the government, there can be no expenditure of public money without a written binding contractual agreement. That document must specify what goods and services are to be delivered. That is the law. That is where the money trail starts, with a contract. That is where audit work should begin. It is square 1 on the audit roadmap.

Beyond the contract, there are a number of critical data points or, you might say, dots. These should pop up on the auditor's radar screen. These may include contract modifications, recorded obligations, inspection and receiving reports, invoices, and payments, eventually.

To get a handle on fraud and waste, auditors then need to connect all the dots between the contract that starts over here at the beginning and the final payment of money over here. They need to make all of the hookups. For example, when contract requirements can't be matched with payment, well then, bingo; there is a potential problem.

This is what is called a full-scope, end-to-end audit. This is what auditors must do to document and verify fraud and waste. Doing that work positions them to answer two key oversight questions: Did the government get what it ordered at the agreed-upon price and schedule or did the government get ripped off?

Top audit officials repeatedly and consistently told my investigators that doing genuine contract audits was ``impossible, we can't do it, it's too difficult.''

One audit appears to illustrate and typify the seemingly impassable obstacle, or brick wall, perceived by the auditors. The report is entitled ``The U.S. Air Force's Central War Reserve Material Contract.'' It is report No. D-2009-108.

Instead of attempting to verify payments at the primary source, which is the Defense Finance and Accounting Service, the audit team opted for an unauthorized shortcut. When you are following the taxpayers' money to see if there is fraud involved, you are going to find some shortcut?

They chose, then, to rely on payment data provided by who? The contractor, DynCorp, the target of the audit. Even using this flawed audit procedure, examiners were unable to match contract requirements with payments. Then when they could not do it, they just give up. The report concluded:

The government did not know what it was paying for. ..... It may have paid for services DynCorp did not perform.

The auditors then simply turned a blind eye to the potential fraud here in this instance.

One hundred sixty-one million dollars went out the door, and for what, we don't know. The report does not tell us. It does not nail down all of the pertinent facts. It is inconclusive and unfinished. The auditors just kicked the can down the road, bucking it to another Defense Department audit agency.

Clearly, auditing large, complicated Defense Department contracts where there is no audit trail to follow is, we have to admit, a daunting task.

But that does not mean it is a mission impossible. It can be done. It has to be done. Senior managers refer to this task as ``audit trail reconstruction work. It is labor intensive pick and shovel work.''

Today, the inspector general relies on small rinky-dink 5- or 10-member audit teams. That doesn't cut it. The IG needs to deploy much larger teams consisting of 25, 50, or even 100 auditors or more to tackle the most egregious contract jobs. And I don't mean hire more than the 675 employees who are already there eating up $90 million.

Let me make one point crystal clear right now--and I am repeating because I think it is important. I am not suggesting the IG needs to hire more auditors. This should be done within available resources. What I am saying is this: The audit office needs to switch from a large number of small teams to a small number of large teams. That would be a reallocation of audit resources. The top audit office official said it would be possible ``to cobble together such an audit team to look at one of the big weapons programs.'' However, doing that would ``deplete resources needed to meet other priorities.''

The ``other priorities'' referenced by this top official are probably wasteful reviews of the Department's policy and procedures--in other words, doing policy auditing instead of doing financial auditing.

In 2009, the audit office did not conduct one in-depth contract audit of a major weapon system or contract. Aren't major weapon systems an audit priority? The record suggests that it is not an audit priority.

To this Senator from Iowa, this is an astonishing revelation. The inspector general is not doing contract audits. How can this be? If the IG is doing contract audits, then the office of the IG is not or should not be open for business--ought not to be spending that $90 million.

The core IG mission is to detect and report fraud, waste, and abuse to the Secretary and to the Congress and to recommend corrective action. To detect and verify fraud and waste, auditors need to be on the money trail 24/7. That is where most fraud occurs. They need to be connecting all the dots between contract signing over here and the last payment being made over here.

Instead of trying to do contract audits, the audit office gave up and moved to greener, easier pastures. Most audits now focus on policies and procedures. In moving in this direction, the inspector general has strayed far from a core mission costing $90 million. Today's preference for policy audits yields zero benefits to the taxpayers. These reports cost about $800,000 apiece. Cranking out worthless policy audits may not qualify as misconduct, but it surely is a blatant waste of precious tax dollars, at $90 million a year.

The current focus on policy audits helps me understand why 765 auditors--with an annual budget of $90 million--could not root out any measurable fraud or waste last year. The IG there at the Department of Defense needs to hit the reset button and refocus the audit effort on the core IG mission.

First, he needs to resume full-scope contract audits to root out fraud and waste. Second, the audit office needs to aggressively review all the Defense Department's plans and programs for deploying a modern accounting system. It needs to offer specific recommendations that would help the Department reach the 2020 readiness goals.

I am receiving assurances from the IG at the Department of Defense that he is moving smartly in the right direction. The signals from that office are very encouraging. Yet I remain skeptical. The audit office still seems to think that full-scope contract audits are a nonstarter and policy reviews are highly relevant. We need a change of course.

Mr. President, I yield the floor.

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