Empowering Employee Owned Businesses and Cooperatives through Access to Capital (House Small Business Committee hearing, September 30, 2021)
Summary
Transcript of the House Committee on Small Business hearing Empowering Employee Owned Businesses and Cooperatives through Access to Capital, on September 30, 2021, published as Small Business Committee Document Number 117–034. Chairwoman Nydia Velázquez and Ranking Member Blaine Luetkemeyer gave opening statements. Witnesses were R.L. Condra of National Cooperative Bank, Tatia Cooper of Home Care Associates in Philadelphia, Gary Shorman of Eagle Communications in Hays, and Alice Frazier of Bank of Charles Town for the Independent Community Bankers of America. The appendix adds material from Capital Impact, the Credit Union National Association, NCBA CLUSA, a letter in support of SBA direct lending and an American Banker opinion piece.
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“Empowering Employee Owned Businesses and Cooperatives through Access to Capital (House Small Business Committee hearing, September 30, 2021).”
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EMPOWERING EMPLOYEE OWNED BUSINESSES
AND COOPERATIVES THROUGH ACCESS TO
CAPITAL
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
HEARING HELD
SEPTEMBER 30, 2021
Small Business Committee Document Number 117–034
Available via the GPO Website: www.govinfo.gov
U.S. GOVERNMENT PUBLISHING OFFICE
45–635 WASHINGTON : 2021
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HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA VELÁZQUEZ, New York, Chairwoman
JARED GOLDEN, Maine
JASON CROW, Colorado
SHARICE DAVIDS, Kansas
KWEISI MFUME, Maryland
DEAN PHILLIPS, Minnesota
MARIE NEWMAN, Illinois
CAROLYN BOURDEAUX, Georgia
TROY CARTER, Louisiana
JUDY CHU, California
DWIGHT EVANS, Pennsylvania
ANTONIO DELGADO, New York
CHRISSY HOULAHAN, Pennsylvania
ANDY KIM, New Jersey
ANGIE CRAIG, Minnesota
BLAINE LUETKEMEYER, Missouri, Ranking Member
ROGER WILLIAMS, Texas
JIM HAGEDORN, Minnesota
PETE STAUBER, Minnesota
DAN MEUSER, Pennsylvania
CLAUDIA TENNEY, New York
ANDREW GARBARINO, New York
YOUNG KIM, California
BETH VAN DUYNE, Texas
BYRON DONALDS, Florida
MARIA SALAZAR, Florida
SCOTT FITZGERALD, Wisconsin
MELISSA JUNG, Majority Staff Director
ELLEN HARRINGTON, Majority Deputy Staff Director
DAVID PLANNING, Staff Director
(II)
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CONTENTS
OPENING STATEMENTS
Page
Hon. Nydia Velázquez ............................................................................................. 1
Hon. Blaine Luetkemeyer ....................................................................................... 3
WITNESSES
Mr. R.L. Condra, Senior Vice President, National Cooperative Bank, Arling-
ton, VA .................................................................................................................. 5
Ms. Tatia Cooper, President, Home Care Associates, Philadelphia, PA ............. 7
Mr. Gary Shorman, Chairman and Chief Development Officer, Eagle Commu-
nications, Hays, KS .............................................................................................. 9
Ms. Alice Frazier, President and Chief Executive Officer, Bank of Charles
Town, Charles Town, WV, testifying on behalf of the Independent Commu-
nity Bankers of America ...................................................................................... 11
APPENDIX
Prepared Statements:
Mr. R.L. Condra, Senior Vice President, National Cooperative Bank, Ar-
lington, VA ..................................................................................................... 37
Ms. Tatia Cooper, President, Home Care Associates, Philadelphia, PA ...... 40
Mr. Gary Shorman, Chairman and Chief Development Officer, Eagle
Communications, Hays, KS .......................................................................... 45
Ms. Alice Frazier, President and Chief Executive Officer, Bank of Charles
Town, Charles Town, WV, testifying on behalf of the Independent Com-
munity Bankers of America ......................................................................... 53
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
Capital Impact .................................................................................................. 60
Credit Union National Association (CUNA) ................................................... 63
Letter in support of SBA direct lending ......................................................... 64
NCBA CLUSA ................................................................................................... 68
Opinion - American Banker ............................................................................. 71
(III)
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EMPOWERING EMPLOYEE OWNED BUSI-
NESSES AND COOPERATIVES THROUGH
ACCESS TO CAPITAL
THURSDAY, SEPTEMBER 30, 2021
HOUSE OF REPRESENTATIVES,
COMMITTEE ON SMALL BUSINESS,
Washington, DC.
The Committee met, pursuant to call, at 9:59 a.m., in Room
2360, Rayburn House Office Building, Hon. Nydia M. Velázquez
[chairwoman of the Committee] presiding.
Present: Representatives Velázquez, Davids, Phillips, Bourdeaux,
Carter, Chu, Evans, Delgado, Houlahan, Mr. Kim, Craig, Luetke-
meyer, Williams, Hagedorn, Stauber, Meuser, Tenney, Garbarino,
Ms. Young Kim, Van Duyne, Donalds, and Salazar.
Chairwoman VELÁZQUEZ. Good morning. I call this hearing to
order.
Without objection, the Chair is authorized to declare a recess at
any time.
I would like to begin by noting some important requirements.
Standing House and Committee rules and practice will continue to
apply during hybrid proceedings. All Members are reminded that
they are expected to adhere to the standing rules, including deco-
rum.
House regulations require Members to be visible through a video
connection throughout the proceeding, so please keep your cameras
on. Also, please remember to remain muted until you are recog-
nized to minimize background noise.
If you have to participate in another proceeding, please exit this
one and log back in later.
In the event a Member encounters technical issues that prevent
them from being recognized for their questioning, I will move to the
next available Member of the same party, and I will recognize that
Member at the next appropriate time slot, provided they have re-
turned to the proceeding.
For those Members and staff physically present in the committee
room today, in accordance with the attending physician’s most re-
cent guidance, all Members and staff who attend this hybrid hear-
ing in person will be required to wear masks in the hearing room.
Furthermore, all Members and staff who have not been fully vac-
cinated must also maintain 6-foot social distancing from others.
With that said, Members will be allowed to briefly remove their
masks if they have been recognized to speak.
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The COVID crisis dealt a severe blow to American workers. In
2020, the pandemic raised unemployment rates, halted wage
growth, and lowered employee satisfaction with their jobs. This
shock occurred as the labor force was already contending with ris-
ing income and wealth inequality and growing uncertainty sur-
rounding retirement security.
The Small Business Committee serves as the voice of small firms
in Washington. This includes the employees that help power these
businesses, as well as entrepreneurs that start them.
One such proven solution to alleviating the problems facing these
workers is through the employee-owned business model, which
takes various forms, but has a united principle that the interest of
the employees and owners are aligned.
Today, I would like to focus on two of the most prominent types
of employee-owned businesses: the Employee Stock Ownership
Plan, also known as ESOP, and cooperatives. ESOPs and coopera-
tives create a link between the fortune of employees and the per-
formance of the companies they work for. As revenues and profits
rise, employs are compensated, helping to create a culture of own-
ership in the enterprise. This model helps to raise wages, promote
job preservation, and increase worker benefits.
Employee-owned entities are also more resilient than their peers
in the face of crisis. For example, a study by the Employee Owner-
ship Foundation found that during the COVID crisis, ESOP firms
retained more jobs, maintained standard hours and salaries, and
provided protective measures at higher rates than typical firms.
Given the long list of benefits associated with employee-owned
businesses, Congress must explore ways to facilitate and encourage
the formation of these enterprises. Though employee-owned compa-
nies have become more prominent over the years, they continue to
face unique obstacles. For example, co-ops have an especially hard
time accessing capital through the SBA 7(a) loan program. They
are locked out of the 7(a) due to their requirement of a personal
guarantee from anyone who owns 20 percent or greater share of a
business.
Congress took steps to address this issue by passing legislation
I sponsored in 2018. The main street Employee Ownership Act
sought to lower barriers to accessing capital and allow more em-
ployee-owned firms to participate in SBA programs. Unfortunately,
the SBA failed to follow congressional intent and declined to pro-
pose alternatives for co-ops to secure a loan without a personal
guarantee.
That is why as part of our Committee’s title of the Build Back
Better Act, we provided $500 million in funding for a cooperative
lending pilot within 7(a) without the requirement of a personal or
entity guarantee.
Today, I look forward to examining the potential impact of the
cooperative lending pilot program and exploring other ways that
Congress can help employee-owned businesses.
I look forward to hearing from our witnesses today about the
benefits of employee ownership, the challenges these firms face,
and what this committee can do to help.
I now would like to yield to Ranking Member Mr. Luetkemeyer
for his opening statement.
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Mr. LUETKEMEYER. Thank you, Madam Chair.
I would like to begin by addressing what is happening a few
floors below us at the House Financial Services Committee this
very morning. Financial Services Committee will be hearing from,
of all people, Treasury Secretary Janet Yellen.
Although I am glad that Secretary Yellen has finally found her
way to one of our House committees, I must address yet again that
it has now been over 150 days since the Secretary has defied her
legal duty to testify before our committee, the Small Business Com-
mittee, on COVID-19 relief for small businesses. Simply put, Sec-
retary Yellen continues to break the law, and my colleagues on the
other side refuse to hold her accountable.
The Paycheck Protection Program was created with two agencies
spearheading the efforts: Department of Treasury and the Small
Business Administration. With nearly $800 billion in assistance
flowing through the program, it was one of the most important
small business relief programs to assist and save the nation’s
smallest companies and their most important asset, their employ-
ees, in history.
It is clear that while Secretary Yellen flouts her statutory re-
sponsibility to the program, she is also ignoring American small
businesses. This blatant disregard for main street USA appears to
be a pattern within the Biden administration. Take, for example,
the Biden tax hikes that are currently making their way through
Congress, without Republican input. Increases to the corporate tax
rate, increases to the individual rates, and the increases to the cap-
ital gains rate will all crush our country’s small businesses.
While small businesses continue to recover from COVID-19, they
are being impacted by supply chain issues, skyrocketing inflation,
and a major labor shortage. And this administration’s response to
all these issues is to increase taxes. All the while, the Treasury
Secretary continues to turn her back on our nation’s smallest firms,
which is her statutory duty, by the way.
Madam Chair, last week, I sent you a letter requesting that we
subpoena her to testify. I look forward to working with you on next
steps in order to conduct a hearing with the Treasury Secretary
and the SBA Administrator as soon as possible.
Now, today’s hearing and topic are important. Employee-owned
businesses are a viable option for many small businesses, especially
with owners aging and planning next steps. However, I think it is
necessary to also discuss some of the recent policy proposals put
forth by my colleagues and how these proposals will impact small
businesses’ access to capital.
Early in the month, this Committee met to examine the small
business provisions within the Democrats’ partisan, reckless, so-
cialist spending spree. Not surprisingly, we saw numerous provi-
sions that disregard responsible lending standards. Chief among
these changes were language to create a direct lending option at
SBA. This path that the Democrats are taking toward a one-lender
model is extremely concerning.
A few weeks prior to the creation of this direct lending tool, the
Biden administration’s SBA threatened lenders with audits if they
didn’t join with the newly created Direct Forgiveness Portal. These
are dangerous trends for many reasons.
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Existing public-private lending guarantee partnership harnesses
the efficiencies of competition to deliver assistance to small busi-
nesses. As we all know, the federal government doesn’t face com-
petition. Importantly, private sector lenders also bring their own
fraud protection oversight to the table. In fact, we have a case
study right before us that examines SBA’s direct lending model.
The Economic Injury Disaster Loan program, which was acti-
vated at the onset of the pandemic, has underperformed compared
to the private lender-driven PPP program. EIDL continues to be
slow and cumbersome, and the SBA’s lack of response and commu-
nication on loan questions has been frustrating and unacceptable.
When it comes to fraud, report after report from the SBA’s In-
spector General and others have highlighted that the program is
layered with massive amounts of potential fraudulent loan activity.
And, unfortunately, the fraud numbers continue to rise.
It is important to note that we know all these problems are asso-
ciated with direct lending. Yet my colleagues are continuing down
this path. We also know the pitfalls of waiving the personal guar-
antee on loans moving forward. And this absolutely blows my
mind. SBA in its own words said of the personal guarantee, this
requirement is to ensure that SB adequately mitigates the risk to
the loan program and ultimately to the taxpayer. And yet they
won’t do away with it.
My Republican colleagues and I will not sit quietly and allow
more taxpayer dollars to be exposed to fraud, waste, and abuse
through the SBA’s programs. Underwriting standards should not
and cannot be reduced. These are vital topics that this Committee
should examine thoroughly. I look forward to exploring many of
these topics today with our witnesses.
I came across a discussion yesterday with somebody and I made
the comment that entrepreneurship is strong but next economy is
on the way. Ladies and gentlemen, if we want to grow this econ-
omy, we have to protect the small businesses, the entrepreneurs of
this country, to be able to grow our next economy.
Madam Chair, thank you for the hearing. And I yield back.
Chairwoman VELÁZQUEZ. Thank you, Mr. Luetkemeyer. The
gentleman yields back.
I would like to take a moment to explain how this hearing will
proceed. Each witness will have 5 minutes to provide a statement
and each Committee Member will have 5 minutes for questions.
Please ensure that your microphone is on when you begin speaking
and that you return to mute when finished.
With that, I would like to introduce our witnesses.
Our first witness is Mr. R.L. Condra. Mr. Condra is the Senior
Vice President of government relations for the National Coopera-
tive Bank, a national financial institution dedicated to providing
banking solutions for cooperatives and their Members. He also
serves on the board of CooperationWorks!, a national network of or-
ganizations focused on co-op development.
Prior to joining the private sector, Mr. Condra worked as a Sen-
ate professional staffer.
Thank you for joining us today, Mr. Condra.
Our second witness is Ms. Tatia Cooper, President of Home Care
Associates of Pennsylvania, a worker-owned cooperative based in
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Philadelphia providing in-home respite and senior care. Home Care
Associates got started in 1992, in partnership with another home
care co-op based in the Bronx, New York, a testament to the power
of co-ops helping each other start up and expand.
Welcome, and thank you for joining us today, Ms. Cooper.
Our third witness is Mr. Gary Shorman, the Chairman and Chief
Development Officer of Eagle Communications, a 100 percent em-
ployee-owned ESOP, based in Hays, Kansas. Eagle Communica-
tions started the self-conversion process in 1998 and became major-
ity owned by its employees in 2002. They have been 100 percent
employee-owned since 2012.
Thank you for joining us today, Mr. Shorman.
The Ranking Member, Mr. Luetkemeyer, will now introduce our
final witness.
Mr. LUETKEMEYER. Thank you, Madam Chair.
Ms. Frazier is the president and chief executive officer of the
Bank of Charles Town in Charles Town, West Virginia, and a lead-
ing official with the Independent Community Bankers of America,
ICBA.
Community banks have played a significant role in assisting and
rescuing small businesses during the COVID-19 pandemic. Beyond
this emergency period, community banks, which are known for
their focus on relationship banking, serve our nation’s small busi-
nesses consistently day in and day out. Across our vast country,
community banks provide access to capital financial assistance to
entrepreneurs and small businesses as they strive to offer the best
products and services to their customers. Their dedication to cus-
tomer service and serving our communities honestly and responsi-
bility cannot be matched.
Ms. Frazier, welcome. Welcome back to the Committee. We
thank you for joining us again to represent the nation’s smallest
banks. We are also grateful for you attending in person. Thank you
very much.
And, with that, Madam Chair, I yield back.
Chairwoman VELÁZQUEZ. The gentleman yields back.
Thank you witnesses for being here today.
Mr. Condra, you are recognized for 5 minutes.
STATEMENTS OF MR. R.L. CONDRA, SENIOR VICE PRESIDENT,
NATIONAL COOPERATIVE BANK, ARLINGTON, VA; MS. TATIA
COOPER, PRESIDENT, HOME CARE ASSOCIATES, PHILADEL-
PHIA, PA; MR. GARY SHORMAN, CHAIRMAN AND CHIEF DE-
VELOPMENT OFFICER, EAGLE COMMUNICATIONS, HAYS, KS;
AND MS. ALICE FRAZIER, PRESIDENT AND CHIEF EXECU-
TIVE OFFICER, BANK OF CHARLES TOWN, CHARLES TOWN,
WV, TESTIFYING ON BEHALF OF THE INDEPENDENT COM-
MUNITY BANKERS OF AMERICA
STATEMENT OF R.L. CONDRA
Mr. CONDRA. Good morning, Chairwoman Velázquez, Ranking
Member Luetkemeyer, and Members of the Committee.
I had the honor of testifying on this issue last year. I would like
to thank the Committee’s continuing interest regarding the Small
Business Administration’s inability to provide cooperative busi-
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nesses access to its lending programs. I would also like to thank
the Committee for its vision to create a cooperative pilot program
that will provide much needed capital and build institutional
knowledge of this business model within the agency.
Is there anything more gratifying than becoming a small busi-
ness owner? During the pandemic, haven’t we learn how essential
grocery stores are to our communities? Unfortunately, the SBA, the
federal agency that oversees small business assistance and growth,
continues to block cooperative businesses and their tens of thou-
sands of jobs from being created.
To be clear, cooperative businesses should have the same oppor-
tunities, service, and financial products as other SBA borrowers.
There are over 65,000 cooperatives in the U.S., and the top 100
generated $226 billion in annual revenue in 2020. Some notable co-
operatives include REI, Ace Hardware, Ocean Spray, Land
O’Lakes, and Congressional Federal Credit Union. In the last dec-
ade, the number of worker cooperatives have doubled and have be-
come a preferred business option for young people, women, minori-
ties.
According to the 2019 Worker Cooperative Economic Census, 50
percent of owners of worker co-ops are Latino and African Amer-
ican, and women make up 60 percent of the workforce. Addition-
ally, over 160 food cooperatives have opened during this time, cre-
ating over 4,200 jobs. Last year, startup food cooperatives have
opened in Colorado, Nebraska, Virginia, Ohio, Pennsylvania, and
New York. All this progress has occurred without the SBA’s assist-
ance.
The SBA has amended its outdated eligibility regulations to in-
clude cooperatives, but continues to block these businesses from ac-
cessing its programs with its own federal version of a catch-22.
Now technically eligible, co-op businesses must meet the agency’s
personal guarantee requirement, which states that any owner of 20
percent of the business must sign a personal guarantee for a loan.
Due to its unique business structure, a co-op is just not able to
meet the check-the-box personal guarantee requirement the SBA
requires. For example, if a custodial worker cooperative in New
York City is owned equally by 10 women, which owner of one-tenth
of the business signs the personal guarantee? If a food cooperative
has 5,000 Member owners, which customer signs over their house
to cover the other 4,999 customers?
A cooperative borrower does have skin in the game. They raise
money through Member shares and Member loans that should se-
cure financial and equity obligations that lenders require.
In 2018, Congress attempted to level the playing field for co-
operatives by passing the main street Employee Ownership Act,
championed by Chairwoman Velázquez and Senator Gillibrand. We
were greatly disappointed to learn the SBA did not provide prac-
tical alternatives for loans, as required by law. Essentially, the
SBA ignored congressional direction and the needs of business own-
ers and consumers.
My employer, the National Cooperative Bank, has provided loans
of more than $2 billion to cooperatives and independent retailers,
including over $77 million to food cooperatives. Per our loan poli-
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cies, we do not require a personal guarantee for consumer and
worker cooperative loans.
Along with the private sector, there is federal precedent for not
requiring personal guarantees to cooperatives. The Department of
Agriculture does not require personal guarantees for loans to co-
operatives, but most startups are in urban areas. Ironically, even
SBA does not require personal guarantees for loans to Employee
Stock Ownership Plans, known as ESOPs, that have a similar
structure as worker cooperatives.
So why is there a need for a cooperative pilot program? The sec-
tor caught a break when Congress removed the personal guarantee
requirement in the CARES Act for all EIDL and PPP business
loans, thus giving cooperatives access to federal funding during the
pandemic. Although, this Committee had to include specific billing
which for cooperative businesses to become eligible for the COVID
relief programs.
Using the SBA reported numbers, the National Cooperative Busi-
ness Association estimates that over 2,500 cooperatives received
COVID-relief loans totaling $1.2 billion in funding that saved over
93,000 jobs.
Chairwoman Velázquez, let me personally thank you and the
Committee for helping these businesses and workers during one of
the most difficult times of our country. Please be aware that the
same co-op businesses that received COVID relief funding are still
not able to access the SBA’s existing loan programs.
Now, especially in Black and Brown communities, entrepreneurs
are turning to the cooperative model as an opportunity to own a
business or meet the grocery needs in their neighborhoods, many
of which are food deserts. In 2015, Pastor Reginald Flynn of Flint,
Michigan, wanted to start a food cooperative due to the grocery
chain closures in his community. Pastor Flynn was unable to ob-
tain financial support from the SBA. Six years later, he has raised
$7.6 million and now has over 900 Member owners. With the help
of a $1.25 million grant from the State of Michigan, the food coop-
erative has finally started to break ground. This is a success——
Yes, ma’am.
Chairwoman VELÁZQUEZ. Yes. Time expired.
Mr. CONDRA. Thank you.
Chairwoman VELÁZQUEZ. You could—during the question and
answer period, you could expand——
Mr. CONDRA. Thank you.
Chairwoman VELÁZQUEZ.—on the issue that you feel that you
haven’t been able to discuss.
Ms. Cooper, you are now recognized for 5 minutes.
STATEMENT OF TATIA COOPER
Ms. COOPER. Good morning, Chairman Velázquez, Ranking
Member Luetkemeyer, and Members of the Committee. Thank you
for the opportunity to speak today and share Home Care Associ-
ates’ story, and discuss the need to address access to capital chal-
lenges for cooperative businesses.
Home Care Associates of Philadelphia is a small business that is
owned, controlled, and governed by its employees. HCA is the
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only—HCA is, you know, Home Care Associates, and I will refer to
it as HCA throughout.
HCA is the only healthcare cooperative in the State of Pennsyl-
vania, and it is one of 500 cooperatives in the United States. Lack
of access to capital, including Small Business Administration loan
guarantees, is the central reason as to why so few of these busi-
nesses exist.
HCA currently employs 124 full-time employees and 12 part-time
employees. Although these past few years have been extremely dif-
ficult, we are looking forward to celebrating our 30th year in busi-
ness in 2022.
Around 1990, founders of a larger co-op, as Chairwoman
Velázquez pointed out, founders of a larger cooperative in the
Bronx, New York, set out to find money to replicate the model else-
where in the United States. At the time, Philadelphia made sense
because of its large population of elderly and disabled citizens in
need of quality care and because of the number of individuals liv-
ing in poverty in need of a quality job.
HCA’s mission is to provide high-quality home care services to
those who are elderly, chronically ill, or living with disabilities, and
to provide quality jobs where workers embrace opportunities to
learn and grow as Members of the healthcare team. They con-
tribute greatly to the participatory culture and earn competitive
wages and benefits, while building a profitable worker-owned com-
pany.
The challenge to raise cash to start our business was enormous.
Like many other cooperatives, cooperative small businesses, HCA
was not eligible to receive startup support from the U.S. Small
Business Administration. Fortunately, and thanks to others who
believed in our model and mission, including charitable trust foun-
dations and founders of the Paraprofessional Healthcare Institute,
HCA was able to secure the capital it needed to open its doors in
1992. However, I must mention that HCA was very fortunate in
that there were other attempts to start other co-ops in cities that
were not successful in raising capital.
At our 1-year anniversary, HCA established two different classes
of stock: Class A shares were held by our investors, and class B
shares were held by our workers. Worker owners would buy shares
of the company for $500. Most of our owners do not have $500 of
disposable income, so HCA lends the workers the $500, but they
share no interest. The shares are then paid back with $35 deposit
and a payroll deduction of $3 per week.
Upon making the deposit, each worker has one vote, can cam-
paign for a seat on our board of directors, and is eligible to receive
a financial share when the company is profitable. We are proud to
share that all class A shares were donated back to the workers,
making HCA now 100 percent worker owned.
Raising startup capital, though, was just the first of many chal-
lenges we faced. Eighty percent of the consumers that HCA serves
are nursing home or Medicaid eligible, and most of HCA workers
continue to be eligible for Medicaid.
Unlike many noncooperative businesses in the industry, HCA
provides extensive training on both technical and soft skills we be-
lieve necessary to provide quality care. HCA relies on reimburse-
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ment from Medicaid to cover costs associated with training and em-
ployment.
In our efforts to provide a quality job, HCA remains committed
to applying 70 percent of its revenue to worker salaries and bene-
fits. Although we remain true to this goal, many of our workers
and families continue to live below federal poverty levels. Low re-
imbursements contributing to low wages translates to caregivers
who are eligible for Medicaid. This reality is not unique to Home
Care Associates—home care cooperative. PHI reports that one in
every six home care workers in the United States lives in poverty.
Since the onset of the global COVID-19 pandemic, our resources
are quickly depleting. The expense of additional PPE to protect our
workers to remain compliant fell squarely on the business. Fortu-
nately, HCA did qualify for the first round of the Paycheck Protec-
tion Program to support sustaining jobs and salaries, but did not
qualify for round two because we could not include increased oper-
ational expenses that contributed to our increased losses.
Although we have a strict PPE policy, many of our workers
missed work, left work due to lack of access to childcare, or because
they or someone in their family became sick with COVID-19.
The strain on our bottom line continues to be felt and we con-
tinue to struggle now to hire new workers as overtime has in-
creased and the expense related to that increases.
Currently, HCA is struggling to find alternative sources of cap-
ital to support our efforts to sustain our business. Since early 2020,
we have seen a decrease in employees willing to purchase shares
to become worker owners. We are struggling to find ways to pay
a living wage without sacrificing training and benefits, and we lack
the financial support needed to widen our scope of services.
Like many in our industry, supply cannot meet the demand for
service.
Chairwoman VELÁZQUEZ. Ms. Cooper?
Ms. COOPER. If we are to increase volume so that we may re-
main self-sufficient and continue to provide quality care, we must
secure the capital needed to expand our scope of service, pay a liv-
ing wage, provide training, and increase——
Chairwoman VELÁZQUEZ. Ms. Cooper, time has expired. Dur-
ing the question and answer period you will have time to revisit
any issue you that you haven’t discussed. Thank you so much.
And now, Mr. Shorman, you are recognized for 5 minutes.
STATEMENT OF GARY SHORMAN
Mr. SHORMAN. Thank you, Chairwoman Velázquez, Ranking
Member Luetkemeyer, and Members of the Committee. Wish I
could be there in person.
I am Gary Shorman, Chairman of the Eagle Communications.
We are a 100 percent employee-owned company doing business in
Kansas, Nebraska, and Missouri, where we own and operate 31
local radio stations in local and small communities. In addition,
Eagle has created digital and online learning divisions where we
assist our local businesses.
I am also here representing The ESOP Association, a nationwide
nonprofit representing over 3,000 ESOP companies and profes-
sionals.
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I would like to state something right up front. ESOPs and em-
ployee ownership is not an experiment. They are proven, they are
successful, and they are here to stay. It is time for the various
agencies of the U.S. Government, including the Small Business Ad-
ministration, to recognize this, and to treat ESOPs and employee-
owned businesses as the successful, mature businesses that they
are.
According to the most recent figures submitted to the U.S. De-
partment of Labor, approximately 8.6 percent of the entire U.S.
workforce has some ownership in an ESOP. That is more than 14
million American households.
In just a 10-year period of time, from 2008 to 2018, the Depart-
ment of Labor reports that more than $1 trillion in retirement ben-
efits have been paid to ESOP beneficiaries. Let me stay that again.
More than $1 trillion.
In my written testimony, I have listed research showing the
power of ESOPs, not only during the Great Recession, but also dur-
ing the pandemic. ESOPs rebound much faster following economic
downturns, and our company is a great example of that.
Despite of all the strengths, there remain far too many unneces-
sary obstacles for ESOP formation. To begin addressing those ob-
stacles, Congress passed the main street Employee Ownership Act.
I would like to speak to the two main goals of that legislation: ac-
cess to capital through the Small Business Administration’s 7(a)
lending program and a desperate need for awareness initiatives.
During the pandemic, more than 70 percent of all ESOPs were
successfully awarded Paycheck Protection Program loans through
the SBA. That PPP program was administered through the SBA’s
7(a) loan program and utilized the delegated lending authority pro-
gram such that local SBA lenders could approve these time-sen-
sitive loans.
However, in the first few days of the program, there was some
initial confusion because despite the clear intent of Congress and
the main street Act, the SBA does not allow loans to ESOP compa-
nies to be approved through delegated lending authority, instead
requiring ESOP loans to be approved by staff in Washington. For-
tunately, clarification was quickly given and ESOP PPP loans were
allowed to be evaluated and granted by a local lender, just like
every other PPP loan, as Congress intended.
We were one of those PPP beneficiaries. And it was a local famil-
iarity that our lender had with our business that made it a stream-
lined and efficient process. Yet even though our local lender clear
knows and understands our business and has evaluated and given
us a PPP loan, if we were to apply for an SBA loan today, they
could not approve it and would be required to forward our loan ap-
plication to Washington where it might languish for weeks or even
months.
To address these issues, the SBA must streamline lending for
ESOPs. It is as intended by the main street Employee Ownership
Act. We ask that the SBA be unambiguously directed to include
ESOP loans in the preferred lending program. The experience of
PPP program clearly demonstrates that local SBA approved lenders
are fully capable of evaluating responsibly and lending to compa-
nies like ours.
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In addition to lending, the programs—the main street Act also
sought to significantly increase awareness within the privately held
business community about ESOPs. Within the Act, the SBA was
tasked with promoting awareness of ESOPs and employee owner-
ship. Business owners must know the ESOP option exists and must
be able to attain useful unbiased information. And to that end, be
directed to have a centralized and specific office, such as the Office
of Small Business Development Centers, with active public edu-
cation and information effort about ESOPs. Further, we ask that
the SBA undertake specific ESOP relegated educational training
for regional SBA staff. We have been recently encouraged by public
statements and support for employee ownership as articulated by
SBA Administrator Guzman.
As you know, one of the biggest economic challenges ahead is the
looming retirement of baby boomers, who own nearly 2.5 million
businesses. It is known as the ‘‘Silver Tsunami,’’ and this will be
the largest transfer of business ownership over the shortest period
of time in our nation’s history. Many of those businesses have no
succession plan. So time is of the awareness to raise all of the im-
portant issues regarding ESOPs for business owners.
And, finally, while I recognize this is outside the jurisdiction of
this Committee, I would be remiss if I did not speak about what
many of us in the ESOP community view as the biggest obstacle
to the formation and expansion of ESOPs: it is the chilling effect
of the U.S. Department of Labor. And I would recognize and would
like to have a question on that later today.
I appreciate the time you have given me today to share any testi-
mony, and look forward to your questions.
Ms. HOULAHAN. [Presiding.] Thank you, Mr. Shorman.
Ms. Frazier, you are now recognized for 5 minutes.
STATEMENT OF ALICE FRAZIER
Ms. FRAZIER. Good morning, Chairwoman Velázquez, Ranking
Member Luetkemeyer, and Members of the Committee. I am Alice
P. Frazier, president and CEO of Bank of Charles Town, a commu-
nity bank serving markets in West Virginia, Maryland, and Vir-
ginia. Today, I testify on behalf of the Independent Community
Bankers of America, where I am Chair of the Policy Development
Committee and a Member of the Board of Directors. And I thank
you for the opportunity to testify.
Employee-owned and cooperative firms are important ownership
models that deserve our support as lenders, business advisers, and
policymakers. My bank currently lends to two co-op borrowers. Ac-
cess to capital is critical to the success of small businesses of all
ownership types. And in this regard, I will discuss the importance
of preserving community bank SBA lending, which comes at zero
cost to the taxpayer.
An experiment in SBA direct lending in which the agency has a
poor track record would jeopardize access to the capital for small
businesses. Community banks provide practical, real world busi-
ness counseling, and networking opportunities, particularly for
startups, in a way that can never be matched by SBA. We must
not be sidelined in the critical task of creating access to capital. We
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are committed to working with this Committee and the SBA to en-
sure the 7(a) program is reaching the smallest borrowers.
Community banks account for 66 percent of 7(a) loans over the
past 10 years. And my bank has been a SBA lender for over 40
years. The median loan size in our SBA portfolio is just under
$100,000. We recently hired three highly experienced SBA lenders
to place more of an emphasis on this product. The community
bank-small business partnership goes well beyond a loan.
My bank is currently work with an African-American entre-
preneur who has corporate experience but no experience in setting
up a company. He lacks contacts with accountants and lawyers and
other professionals that specialize in startups. And, unfortunately,
as he has told me, African-American entrepreneurs are often dis-
advantaged in this sense. Mentorship is especially needed in minor-
ity business communities.
As we talked about his business plan, he asked for these connec-
tions, and we were happy to provide. We spent time walking him
through different types of loans, eventually settling on a 7(a) line
of credit, which we expect to grow quickly as his business ramps
up.
The loan is really just one feature of a much broader partner-
ship. Our experience in working with other small businesses gives
us a unique ability to provide insights and counseling. I provide
other examples of our small business relationships in my written
statement.
Informed guidance, education, and borrower confidence building
is our core value preposition. We stand by our partners and con-
tinue to provide guidance as the business grows and new opportu-
nities arise or as they encounter setbacks and challenges.
I do not believe that the SBA direct lending could offer any re-
mote substitute for a long-term relationship with a community
bank. Employee ownership and cooperative ownership are models
that make sense for many firms. Community banks support these
firms, bringing the same commitment that they bring to any small
business relationship. And I discuss my cooperative lending in my
written statement.
We are willing to discuss alternative solutions to better accom-
modate co-ops and employee-owned firms. However, we caution
against a broad waiver of guarantee requirement on all 7(a) loans.
SBA lending is not—direct lending is not the answer to capital
access for small businesses of any ownership model. This experi-
ment has been tried and failed, resulting in subsidy rates of 10 to
15 times higher than in loan guarantee programs, as noted in a re-
cent Congressional Research Service report. What is more, as a lo-
cally based lender, we are able to root out fraud to which direct
lending would surely be vulnerable.
I urge this Committee to reconsider the direct lending provisions
included in the Build Back Better Act.
I thank you again for this opportunity to offer my perspective,
and I am happy to answer any questions you may have.
Ms. HOULAHAN. Thank you, Ms. Frazier.
And thank you to all of our witnesses for being here today.
I will begin by recognizing myself for 5 minutes.
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In June of this year, I formed the Stakeholder Capitalism Caucus
with Representative Dean Phillips, who also sits here with me on
the House Small Business Committee and who also shares an en-
trepreneurial background. We created the Stakeholder Capitalism
Caucus in the wake of COVID-19’s pandemic to engage Congress
and business leaders on ways to reimagine the role of corporations
to equitably benefit stakeholders and to lead to a more sustainable
and prosperous economy.
With their unique business structures, ESOPs and cooperatives
have demonstrated that employee-owned business models can
produce higher wages and can promote job preservation for their
workers during periods of economic distress, as well as invest more
in their local communities than conventionally owned businesses
can. While conventionally owned businesses may have outside
stakeholders, the stakeholders of employee-owned businesses are,
in fact, the workers themselves.
I would like to know if any of the panelists can address the ways
in which your business models lend themselves to more equitable
and sustainable conditions for your workers, as well as invest in
your respective local communities in line with the ideal of stake-
holder capitalism. And if it is okay, I would like to start with Mr.
Shorman on that.
Mr. SHORMAN. I like that question. And, frankly, good to see
you again.
When you take a look at what we do in our local communities,
how important it is to have that connectivity in local communities,
that is what we do with our radio stations, that is what we do with
our businesses, is help them grow. And so when you ask that of
being able to talk about that, over the last pandemic, that one that
comes to mind, our ESOP, we did not layoff anyone, we did not fur-
lough anyone. We kept everyone engaged. ESOP fought the same
battles with everyone in dealing with the pandemic and being able
to keep people at work and move them to the right place.
But the employee-ownership model adds a powerful advantage to
local community business because it keeps things local. It keeps
that business local. It keeps those who are the employee owners
right in the middle of working to grow and working together to win
for that company. And we have seen that in results of—not only
of working our way out of the pandemic, but working during the
pandemic of not having to do any layoffs or furloughs.
Thank you for that question.
Ms. HOULAHAN. You are welcome.
Ms. Cooper, would you have anything to contribute as well to
that question? And hello to Philly.
Ms. COOPER. Hello. You know, I want to make sure I under-
stood. It was a two-part question, correct, in that you asked about
the contributions to the community, but also how we have kind of
hung in there? Is that correct?
Ms. HOULAHAN. No. I am largely asking kind of what are the
benefits, do you perceive, of co-ops and ESOPs to making sure that
you are not only helping your shareholders, and in many cases co-
ops and ESOPs the shareholders are the people, but also the com-
munity at large, potentially the environment, investors, all those
kinds of things as well.
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Ms. COOPER. Well, for us, I mean, clearly, we are a home care
business, so we are serving residents of the Philadelphia area every
day by providing direct care.
The one thing I wanted to say, which answers the question as
we were wrapping up, is that, during this pandemic, with all of the
challenges that we face in this industry, the advantage that we
have as a cooperative is that, you know, our worker owners are not
only committed to quality, but they are committed to their con-
sumers. They are here because they want to be.
We know that worker owners stay longer, they work harder, they
are far more committed to their consumers, decreasing the revolv-
ing door of direct care workers going in and out, ensuring that
their consumers are safe, and making sure that they understand
that they are representing the company, that they are going to ben-
efit from both financially and in terms of having say in the direc-
tion of the company.
So we feel, as a cooperative, that that is our advantage in this
industry, that because our workers are owners, they are more like-
ly to stay, more likely to deliver quality care, more likely to con-
tribute positively to the community by way of reducing hospital re-
admittances, accidents, incidents, and preventing illnesses.
Ms. HOULAHAN. Thank you, Ms. Cooper.
And, lastly, for Mr. Shorman again, what can we be doing more
to promote businesses to transition to employee ownership? Many
of you talked about the Silver Tsunami. Many people are trying to
figure out what their transition, you know, exit strategies look like
in this economy, because people are aging out of it, amongst other
reasons. What can we be doing to improve the ideals of ESOPs and
co-ops in the common vernacular?
Mr. SHORMAN. Well, this Committee is doing great work. We
see that every day because we are on the streets working with——
Ms. HOULAHAN. I am afraid that I need to stop you, sir, be-
cause I ran out of time, and I need to go ahead and yield. My time
has now expired.
The Ranking Member, Mr. Luetkemeyer, is now recognized for 5
minutes.
Mr. LUETKEMEYER. Thank you, Madam Chair.
Ms. Frazier, thank you for joining us again today. And I want to
start with you. Appreciate your testimony today. Like you, I am
very concerned about the recent trends in SBA toward direct lend-
ing. You know, we are currently witnessing the devastation of di-
rect lending through SBA’s Economic Injury Disaster Loan pro-
gram. And according to SBA’s own inspector general, the program
has a potential fraud rate of nearly 30 percent. Unbelievable.
And you rightly point out in your testimony, both in your written
and verbal testimony, about the Congressional Research Service re-
port that indicated that SBA, in the late nineties, stopped issuing
direct business loans because the subsidy rate was 10 to 15 times
higher than the subsidy rate for its loan guarantee program, which
means that it was losing 10 to 15 times more money in direct lend-
ing than it was the loan guarantee program, which means it has
no idea what it is doing when it comes to direct lending.
Your comment in there talks about—you are pointing to an ex-
ample of where the bank actually caught somebody with an EIDL
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loan, a fraud attempt and caught them. So I would just appreciate
you expanding on that a little bit more. This is a really, really big
concern to me whenever we see that they are trying to actually pro-
pose more direct lending programs and empower the SBA even
more whenever they can’t handle what they have got right now.
Ms. FRAZIER. Thank you for that question. I am happy to ex-
pand on that.
I might begin with as a new banker, anyone that joins, the first
thing they train you in preventing a bank robbery is look someone
in the eye. And so there is a big value to that when you are getting
ready to lend someone money. And if you are applying for a loan
through a portal or through an opportunity where you really don’t
have to look anyone in the eye, the fraud is opportunity.
So to be able to visit a bank—or visit a business and talk and
speak with the owners of the business, understand their dream and
what they are doing, and really be able to evaluate how effective
they are, helps evaluate the opportunity for the loan to be used
well, successful, and in play.
So I think recently what we did experience, we had read about
the fraud alert the SBA had issued on their website related to
EIDL loans where they had distributed the money, and typically a
borrower would come in and ask for all of the money in cash. We
shared that with our branch managers. And one of them happened
to have an instance where someone had come in and opened an ac-
count about 60 days prior, and had not really had any transactions
in the account, very little for which would have been deemed a
business account by far; had gotten two EIDL loan deposits 2 days
apart and within 4 days came in wanting to take out what was
equal to $20,000 out of the bank in cash.
Now, of course, we had shared that information. Our branch
manager rightly so had reached out to operations. Ultimately, we
returned that money because it was deemed not appropriate at
that time. So the fraud is there, and so I liken it back to being able
to look at folks.
Mr. LUETKEMEYER. As we have gone through this problem,
the inspector general has pointed it out—the SBA’s own inspector
general has pointed it out, and indicates to us that he is trying to
put in place some changes to the program to make it work better.
SBA acknowledges that they are trying to put some things in place.
But in the next breath, inspector general sits there and says, well,
yeah, they are in—the changes are in place, but the employees
don’t follow the procedures. The employees don’t follow the rec-
ommended changes. And as a result, the same things happen.
Have you experienced that, that they ignore the processes?
Maybe you are not even going to be aware of the changes SBA has
to go through to make this work, but just a comment from you.
Ms. FRAZIER. You know, I am not sure I could really speak ef-
fectively directly on that because I am not aware of the changes or
how they operate internally.
Mr. LUETKEMEYER. That is interesting. And, to me, the tem-
plate for how this can actually work is the PPP program standpoint
to the banks who have a know-your-customer law in place; and, ac-
tually, as you said, have to look the customer in the eye, make sure
that those folks are who they say they are, and that they are a real
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business, a real person; their address and phone numbers, their
signatures and Social Security number, all that matches up. Where
when you do this virtually, there is a lot of this that doesn’t take
place.
So, to me, I would like for you to just elaborate just a little bit
in my last 20 seconds here.
Ms. FRAZIER. You know, even through the PPP process or loan
requests we received through our online portal, we would take the
time to either visit their place of business, make sure we reached
out and contacted them; had ways to validate it beyond just a com-
plete virtual experience. And I think that puts us at a lot of risk
if everything is virtual.
Mr. LUETKEMEYER. I appreciate your comments this morning.
And I think that we actually have a template in place which shows
how we can fix the problems at SBA. We just have to make sure
we do it right.
Thank you very much for your testimony.
Ms. HOULAHAN. The gentleman’s time has expired. And the
gentleman yields back.
The gentleman, Representative Dean Phillips, Chairman of the
Subcommittee on Oversight, Investigations, and Regulations, is
now recognized for 5 minutes.
Mr. PHILLIPS. Thank you, Madam Chair. And greetings to our
witnesses and colleagues.
My great-grandfather Jay Phillips started as a newspaper boy in
Manitowoc, Wisconsin, in 1912, and created a business that became
very successful over many years. He used to tell me that owners
act differently than employees. They reuse paper clips and they
turn off the lights when they leave the office. And he believed that
business was a means to an end, and the end wasn’t accumulating
as much capital and wealth as possible, rather sharing as much as
possible.
And in 1941, he created the Phillips bonus and profit sharing
plan, a copy of which I have here in my hand. And he wrote in it:
Unfortunately, the great majority of the people in this country
never achieve the degree of financial independence which permits
them to live out their lives without help from others. I believed,
and still do, that the time to help people solve this problem is dur-
ing the prime of their life and not when they become objects of
charity.
When he introduced this plan in 1941, the top 1 percent of Amer-
icans controlled about 30 percent of wealth in America. Eighty
years later, that number is 40 percent and growing.
I think we can all agree, Democrats and Republicans, that own-
ership is the best example, broad ownership in capitalism. We do
not need a revolution in capitalism, rather evolution. And in my es-
timation, that is employee stock ownership programs.
So my question, starting with you, Ms. Cooper, is, you know, why
are there not more ESOPs in America? And what can we here in
Congress do to incentivize and encourage and promote and, hope-
fully, see national benefits from employees owning more businesses
in America?
Ms. COOPER. I don’t know if I can answer why there aren’t
more in the country. But I can tell you that, you know, in Philadel-
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phia, in Pennsylvania, we work to—the same way Cooperative
Home Care Associates supported us in replicating that model, we
are supporting others in replicating the model, and trying to in
healthcare, you know, really make the connection between owner-
ship and quality of care. We know that in this country we are hav-
ing an issue with delivering care.
You know, we talk about the Silver Tsunami and the number of
people that, you know, are still living independently but may need
some assistance and are beginning to need some assistance, and
how there aren’t just enough people out there. One of the things
that we worry about the most in this industry is fraud and abuse
and neglect.
Well, we know that when someone is an owner, they take a lot
of pride in the level of care that they are delivering. And they take
the work, you know, very seriously. They understand how impor-
tant it is to make sure quality is delivered and to protect those
from fraud, neglect, and abuse. And this is something that all of
our workers have in common and they buy into. And I think it is
necessary in order to create opportunities for quality care, con-
tinuity of care, and to protect our seniors, and people living with
disabilities.
In healthcare, to me, it makes sense that a cooperative or a
worker-owned model contributes to solving the problem in numer-
ous ways, not just in, you know, the delivery of quality care and
the—what ownership means as they are delivering quality care,
but also in the ability to participate in a culture where you then
contribute to the direction of the company and can talk about what
it means to have a quality job and how those two are connected.
So for us it is about not only——
Mr. PHILLIPS. Ms. Cooper, in the spirit of allowing a couple of
others to speak too, if I might just move to Mr. Condra for com-
ments on what we might do here in Congress to promote employee
ownership across the nation.
Mr. CONDRA. Thank you. The number one issue is access to
capital. If you go to a conference, if you talk to cooperative devel-
opers, it is need to access to capital.
The USDA has the business and industry program that does not
require this personal guarantee blockage for cooperatives. If they
were able to make loans to businesses outside of rural areas and
urban areas, we wouldn’t be here today. But, unfortunately, they
can only make loans to rural areas, and the SBA continues to block
access to capital to cooperatives. And the fact is, for banks to do
startups, we need credit enhancements. We need the 7(a) guar-
antee type of guarantee to continue to grow these businesses.
Mr. PHILLIPS. I appreciate it. I just have 10 seconds left. Just
to inspire my colleagues on both sides of the aisle, to pursue what
should be very unifying, which is to expand ownership in the
United States as we try to inspire compassion to capitalism.
With that, Madam Chair, I yield back.
Ms. HOULAHAN. Thank you. The gentleman yields back.
The gentleman, Representative Roger Williams, the Vice Rank-
ing Member of the Committee, is now recognized for 5 minutes.
Mr. WILLIAMS. Thank you, Madam Chair. And I want to thank
all the witnesses for joining us today.
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And in full disclosure, I am a small business owner myself for
51 years, and I haven’t had a day in my life in 51 years I haven’t
owed a community bank money. And they are very important to
me. And I want to also say to the bankers, congratulations on the
way you handled the PPP. It was well done.
In the last year and a half, we have observed how community fi-
nancial institutions are better equipped to handle small business
lending than the federal government. In the early days of the pan-
demic, the private sector was deputized to help deliver business
serving loans quickly to American small businesses through the
Paycheck Protection Program. They were a leading force, and suc-
cessfully executed one of the most successful emergency lending
programs in country’s history. And on the contrary, the SBA’s roll-
out of the Shuttered Venues Operation Grant program, or SVOG,
took over 7 months before they delivered their first dollars, and
was inefficient and lacked transparency.
So, nonetheless, Democrats are still proposing a direct lending
option under the SBA’s 7(a) loan program that will cut off the pri-
vate sector financial institution’s role. And they are the ones who
give service. And to meet the immediate needs of our community
small businesses, we need to get the private sector more involved,
not less.
So, Ms. Frazier, can you speak more on how cutting the private
sector’s lending role from the 7(a) loan program, like Democrats
have proposed, would have affected community banks and small
businesses alike?
Ms. FRAZIER. Thank you for that question. You know, business
lending is just not as simple as it is with consumer lending. There
is a lot of nuances to business lending that you have to take in con-
sideration. It is, what is the business model? How is the financial
reporting? What is the leader like? Are they going to be successful?
Do they have a plan that can work, a location, et cetera? All of
these things play in the factor of making a decision on a loan, not
just completing an application and submitting financial informa-
tion. And, oftentimes, the financial information, you need to talk
with the business owner to understand what is there.
So without that sort of relationship building and understanding
that goes on in a community bank with the small businesses, I am
concerned that the direct lending would really not be as effective
as it could be for that. And with the story that I shared, oftentimes
the small businesses, the entrepreneurs, they don’t understand the
different types of loans that they can use to help their business
grow or the purpose of them. And direct lending might limit that
opportunity or probably will limit that opportunity overall.
Mr. WILLIAMS. A relationship with your banker is much better
than a relationship with the government.
Ms. FRAZIER. Most would say yes.
Mr. WILLIAMS. Community banks are an integral part of main
street America. They provide access to capital, financial services—
as I said, they have me for 51 years—with personalized relation-
ships to the small business they serve. The government must not
impose excessive regulations on banks that will make them less
competitive and less struggling to compete with larger financial in-
stitutions.
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Small businesses depend on community banks for their knowl-
edge around the needs of local communities, and this direct rela-
tionship better positions community and regional banks to assist
small business an reinvest local dollars back into the communities
they are a part of to create more jobs.
So, Ms. Frazier, how are small businesses affected when a local
community banks closes? And how can Congress ensure that com-
munity financial institutions can remain competitive against their
larger, multinational counterparts?
Ms. FRAZIER. Thank you for recognizing how communities are
affected when community banks are closed or are faced with chal-
lenges that prevent them from staying independent and involved in
the community. Oftentimes, what exits first is the community dol-
lars that are vested in the local nonprofits, the different civic orga-
nizations, et cetera, that really need the involvement of the com-
munity banks overall.
But then talk about the small businesses, those relationships
that we build, we invest in, we help. The businesses network with
each other because we know we have the conversations with each,
and we know what someone is looking for and who can help solve
that problem for them.
So I believe what you can do is continue to keep us involved in
programs like the SBA, collaborate with us so that we can make
those guidelines easier for people to access the capital that is need-
ed to continue to grow.
Mr. WILLIAMS. Community banks now know firsthand the im-
portance of main street America having access to capital. So I have
got a little time here. Let me just go right to the question, Ms.
Frazier. Small businesses continue recovering from the COVID-19
pandemic. Can you tell me, and quickly, in your opinion, what the
impact of higher taxes and new costly compliance regulations
would be on both small business and the banks?
Ms. FRAZIER. Right now, what we see is our small businesses
continue to struggle to find employees, to be able to make addi-
tional revenues and profits. So if we added additional taxes, I think
it would be very harmful.
Mr. WILLIAMS. Cutting taxes is always good.
Ms. FRAZIER. For business, yes.
Mr. WILLIAMS. Thank you for your testimony.
Ms. HOULAHAN. The gentleman’s time has expired.
The gentlewoman, Representative Sharice Davids, Chairwoman
of the Subcommittee on Economic Growth, and Tax, and Capital
Access, is now recognized for 5 minutes.
Ms. DAVIDS. Thank you, Chairwoman. And thanks to our wit-
nesses for joining us here today. I am really glad that we are get-
ting the chance to hold this hearing.
You know, employee-owned businesses certainly have an impres-
sive track record of higher employee retention, pay, and have defi-
nitely proven to be more resilient during economic downturns. So,
you know, I think that this conversation is important.
You know, as these companies still might struggle with access to
capital, even with the SBA programs, I think it is important for us
to constantly evaluate how we can be helpful. You know, and that
is why I supported—I have supported legislation like the promotion
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and expansion of private employee ownership. We have to do a bet-
ter job with our marketing here—Promotion and Expansion of Pri-
vate Employee Ownership Act.
You know, I think bills like this, you know, we are talking about
expanding tax incentives, federal assistance for ESOPs to encour-
age small businesses to use this business model.
And, you know, I was also glad that we got the chance to put
out from this Committee our portion of the Build Back Better Act,
which would include $500 million for a pilot program for coopera-
tives and ESOPs to receive SBA loans without a personal or entity
guarantee.
And, you know, I am proud to support this kind of legislation,
because this is the stuff that benefits stability for companies and
provides their employees and customers—employee owners and
customers during critical times. You know, we are in some, like,
very uncertain economic times.
And, with that, I definitely want to make sure that I talk to Mr.
Shorman, a fellow Kansan here. Thanks for joining us. I was hop-
ing to hear you talk a little bit about employee-owned businesses,
specifically, you know, how ESOPs and such have been more resil-
ient during the economic downturn. And then, you know, maybe
how the resiliency maybe correlates with higher retirement savings
and that sort of thing.
Mr. SHORMAN. Well, first off, I look forward to meeting you in
person, Representative Davids, sometime when we are in Kansas
City to be able to meet up and do that.
But our company, we started in 1998 with our ESOP, and you
have seen the growth of wealth for our employee owners. We had
that with a recent transaction. We saw that, how that paid off for
employee owners as they built the company, and that is the story.
And I grew up on a family farm, and you worked together to
build something so at the end of the day, everybody has, I guess,
a part of the pie and the ability to really focus on what they want
to do. We have seen that in our business.
As far as being able to figure out how to make it easy for compa-
nies to do ESOPs, that is a challenge, because you can set up a
401(k), and you have clear rules for making that happen, but an
ESOP is more complicated than that. And what this Committee is
doing to kind of simplify that, looking for ways to find easier ac-
cess, looking to your community bank to make that happen, and
secondly, being able to get clear regulatory guidance, and that is
one of the biggest challenges. The DOL has perpetuated an absence
of formal regulatory guidance. And so being able to have clear guid-
ance would allow companies to jump in and be able to share that
model.
Because in local communities, owners, and we see them every
day, owners that are running these smaller businesses don’t have
a big team of executives that can go to D.C. and do that, but they
do have a team of people who can work with the local bank to grow
that business. And being able to keep that business local versus
selling to another big corporation or something like that is so very
important, especially in Kansas. And we have so many of those
local business owners that want to transition to something else. We
would just like it to be an ESOP.
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Ms. DAVIDS. Yeah. I appreciate that. And, definitely, I will con-
tinue to figure out ways to be supportive from the Small Business
Committee, and would be open to further conversations about how
we might work with the Department of Labor, you know, to clarify
some regulatory—the guidelines.
Mr. SHORMAN. We would appreciate that. Thank you.
Ms. DAVIDS. I appreciate all of you taking the time to join us,
and I yield back.
Chairwoman VELÁZQUEZ. [Presiding.] The gentlelady yields
back.
Now we recognize the gentleman from Minnesota, Mr. Hagedorn,
Ranking Member of the Subcommittee on Underserved, Agricul-
tural, and Rural Business Development, for 5 minutes.
Mr. HAGEDORN. Thank you, Madam Chair. Thank you. I ap-
preciate the opportunity. It is nice of you to hold this hearing.
And I am somebody who has been a pretty strong supporter of
employee-owned businesses and co-ops. Visited many across our
district, talked to a lot of employees who seem to appreciate the op-
portunity to kind of build their own future, you know, grow their
own retirement, have some control of it, feel like they are part of
it. And it is amazing, the millions and millions of Americans who
are in the workforce that are participating. So it is, I think, a big
success and something we should continue to see what we can do
to foster and certainly not put any impediments in there.
I would ask Mr. Shorman; you seem to be a strong advocate. Per-
haps you could just let everyone know a little bit more about why
it is such an opportunity for not just business owners to convert
this way but for the employees.
Mr. SHORMAN. If you look at it—and thank you. You look at
it from an employee standpoint. You can work for a company your
entire career, and at the end of your career maybe have some sort
of 401(k) or maybe a government retirement. You work for an em-
ployee-owned company, and we have seen that happen where the
employees have worked for a company 20 years, and they end up
retiring, but they have a nest egg that they are able to do things
that they want to do. You can’t do that in a regular company. But
as an employee owner, you participate day in, day out in the
growth and success of the company, and we see that in the success,
and that also means that success stays in the local community.
And our company is based locally. We have to have strong local
businesses. So to see them being able to transition into an ESOP
and take their company, keep it local and share that ownership,
that is a powerful way to do business, especially in small markets,
small communities across our country.
Mr. HAGEDORN. It is just an excellent option. Obviously, no-
body has to do it. People buy into it, and the employees, like I said,
that I have spoken with have been very, very pleased.
So I think this Committee is very, very fortunate to have some-
body like our Ranking Member, Mr. Luetkemeyer, who has a back-
ground in community banking, and he brings up some very good
points. I mean, if we are—if the SBA wants to take some of these
things over and expand their portfolio, boy, there has been some
problems there, a lot of waste, fraud and abuse, as he said. We
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don’t need any more of that, and we need a little bit more customer
service.
I think Congressman Williams hit it right. Who is going to be
there for the customer more than the community bank or the peo-
ple in the community, invested in the community, who already
have them as customers, or a big government bureaucracy or a big
corporate bureaucracy? I am one Republican certainly never stands
up and advocates for the big banks. I think the community banks
have been hit hard.
What do you think? Don’t you think you are in a much better po-
sition to deliver those services maybe than others and do it in a
way that is going to protect the taxpayers?
Ms. FRAZIER. Thank you. I completely agree with what you say.
We live in the communities we serve. We see our business leaders
at church. We see them in the grocery stores. We see them out
shopping, at the soccer games, et cetera, so we are involved in the
community with them side by side. It is just not a faceless applica-
tion. It is just not a faceless business. We know when their busi-
nesses are thriving and we know when they are struggling, and we
do what we can to help. So I think community banks are the part-
ners and really what help make communities thrive.
Mr. HAGEDORN. Thank you. Now, the majority wants to take
a bunch of money that is created by capitalism—and I would say
capitalism is always compassionate, because without producing
wealth, you have no wealth in order to help people. So—and they
want take a bunch of money and say, look, we are going to help
you here. What they fail to talk about is how the other part of their
bill is going to raise taxes and how their other agenda is going to
increase regulations and how part of both agendas, both in this bill
and across the board, is going to drive up the cost of energy need-
lessly and make it less reliable.
And, lastly, who knows about trade? We haven’t seen much from
the administration on that. And then fiscal policy, we see what is
going on with inflation. It is just going to be spurred more.
You know, those things, those good government or bad govern-
ment policies are way more important than government handing
out money in order to have capital in this case. You can destroy
businesses. You can give them all the money in the world, but if
you are going to have policies that will destroy them, what dif-
ference does it make?
And I think a lot of businesses across our country need to reflect
on this, and a lot of employees, that we are in a crossroads. And
a lot of these policies that are coming out of Washington on the
other side stand to destroy them and put them out of business for-
ever, businesses that have been around for generations.
So while I appreciate the need for capital, and we will do what
we can in order to help people, I do not appreciate the philosophy
and the policies of the Democrat Party overall on this bill.
Thank you.
Chairwoman VELÁZQUEZ. The gentleman yields back.
Now I recognize myself for 5 minutes.
Mr. Condra, the USDA Business and Industry Loan Program
does not require a personal guarantee from cooperatives. Instead,
USDA requires co-op Members to sign a covenant to withhold profit
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distribution until the agency loan is paid in full. Could this work
for the SBA loans to co-ops in place of a personal guarantee?
Mr. CONDRA. This could—this could work. This could work.
And, also, if we sat in a room, we could think of all kinds of alter-
native ideas that the main street Act encourages SBA to do.
Chairwoman VELÁZQUEZ. Thank you.
Ms. Frazier, the number of 7(a) loans made under $150,000 de-
creased by 44 percent over the past decade. The decline is even
more troubling for 7(a) loans below $50,000, which decreased by 59
percent over the last 5 years. The average 7(a) loan size has also
more than doubled in that time. In fiscal year 2012, it was just
over $340,000. As of September 2017, the average loan size this fis-
cal year is over $687,000.
Many people will say smaller loans, those under $150,000, are
not profitable, so traditional lenders are not making those loans. So
what do you say to small businesses who are seeking loans of
under $150,000? What do you say to them?
Ms. FRAZIER. Thank you. And there is no way we can refute the
numbers. I can only share with you my experience working with
our customers. Oftentimes what we see is the expenses of starting
a business are higher today than they were maybe 2, 3, 4 years
ago. And so the loans that we have done to help startups, either
a tenant up fit—and in my testimony I talk about a baseball coach-
ing facility where we helped them up fit a tenant facility, and it
is really nothing more than a warehouse, and they have got some
nets, but the cost of doing so is expensive.
Chairwoman VELÁZQUEZ. Yes. Ms. Frazier, you know, one of
our commitments is to make sure that small businesses have ac-
cess to affordable capital. When you look at the overall portfolio of
loans that have been made, the numbers speak for themselves. We
need to look at alternative options of affordable loans, and this is
one of them. It has worked for the USDA. I do not understand why
it cannot work here.
Mr. Condra, the small business title of the Build Back Better
Act, which was approved by this Committee in early September,
provided $500 million for a cooperative lending pilot that would
waive SBA personal or entity guarantee for co-ops. Will this new
pilot program improve co-ops’ access to 7(a) loans?
Mr. CONDRA. And what a great compromise with this Com-
mittee, with Congress, and the SBA and the private sector. As you
know, we continue to discuss and work with SBA on these issues,
but they just will not budge on the requirements, even though we
have provided examples after examples of why it is not working.
An example, like in my testimony, the pastor raised $7 million.
Apparently, that is not enough money to secure an SBA loan that
they still require him to, I guess, use his used car as collateral over
$7 million. So it will completely open up the gates for this industry,
for the food/grocery industry, and the worker co-op industry.
Chairwoman VELÁZQUEZ. Thank you.
Mr. Shorman, the main street Employee Ownership Act allows
7(a) preferred lenders to process ESOP loans under their delegated
authority to streamline the process for small firms. Unfortunately,
SBA’s rule implementing the law says that those loans cannot be
processed under delegated authority.
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How did the ESOP community respond to SBA’s position which
contradicts the clear language of the statute?
Mr. SHORMAN. Well, I think this Committee has it right. I
mean, trying to get—the direct contact with local community bank-
ers is not a shortcut, but it is a way to get something done that
is not happening today. So the Committee is right on target with
what they are doing. And I think more of what we are talking
about today is just saying, hey, this is what has to be done. ESOPs
should be eligible for SBA loans through the local lending author-
ity.
Chairwoman VELÁZQUEZ. Thank you. My time has expired.
Now we recognize the gentleman from Minnesota, Mr. Stauber,
for 5 minutes.
Mr. STAUBER. Thank you, Madam Chair.
And I just have a few comments. You know, an employee stock
ownership plan, an ESOP, is a wonderful employment structure for
a small business. ESOPs allow their workers the ability to obtain
ownership in the company where they are employed, really comple-
menting the way small businesses normally operate. With over
6,500 ESOP companies nationwide, I am proud to say that over 250
of them are in my great State of Minnesota.
With that being said, I am worried about ESOPs and how they
might fare under this administration’s tax plan, specifically under
the proposed capital gains tax increase. When ESOPs distribute ac-
tual shares of company stock rather than pay out the value of the
shares in cash, the employee pays income tax at ordinary tax rates
on the value of company contributions to the plan, plus capital
gains tax on appreciation and share value when they choose to sell
their shares.
We can sit here and talk all day about the access to capital, but
it seems to me that none of it will make a difference if, on the back
end, individual employees are stuck paying higher taxes.
A capital gains tax increase severely diminishes the incentives
that normally draw individuals into ESOPs. When they look at get-
ting into or potentially getting into an ESOP and they find that
they are going to be paying more taxes, that is a disincentive. We
have to encourage entrepreneurship and encourage people to invest
in their companies and become part of the ESOPs.
Despite this administration’s claims, this current reconciliation
bill will cost something. It will cost the livelihood of small business
owners. It will hurt the middle class with tax hikes and increase
the taxes on middle-income ESOP participants. We can do better
by allowing our small businesses and those participating in ESOPs
to keep more of their hard-earned money.
And, Madam Chair, I yield back.
Chairwoman VELÁZQUEZ. The gentleman yields back.
Now we recognize the gentleman from Pennsylvania, Mr. Evans,
for 5 minutes.
Mr. EVANS. Thank you, Madam Chair.
Madam Chair, first, I would like to welcome Ms. Cooper. And I
am very happy to have the president of a woman-owned work coop-
erative located in my district on this panel. But I am also proud
of this Committee and the Chairwoman’s work to mark up and
pass out of Committee $25 billion to help entrepreneurs in the
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Building Back Better. This includes $500 million for a pilot pro-
gram for workers and consumer cooperatives. This will provide loan
guarantees to eligible small business cooperatives, including short-
and long-term working capital.
Ms. Cooper, how would this pilot program help Homewood Care
and its workers?
Ms. COOPER. Currently, you know, we were able, as I men-
tioned, to get the money we needed for startup, but currently, we
are really struggling to expand our services. And in this current en-
vironment with, you know, the pandemic and us not being eligible
for the second—not having been eligible for the second round of
PPP, a loan from the Small Business Administration would help us
to expand our services, keep our employees employed, but also sur-
vive some of the changes that are going on in this particular indus-
try.
So, you know, right now, we are clawing to, you know, stay alive
in this industry. We know that there are changes that we need to
make in order to remain competitive. So, yeah, it would help us to
continue to stay in business. It would help us to secure our future,
to increase volume, to sustain jobs.
Mr. EVANS. One last question, Ms. Cooper, I want to ask. What
is your secret of bringing this together? I know it is difficult. It has
been very a very difficult time, but I am interested in the personal
aspect of seeking and pulling things together, you know, you driv-
ing to do this.
Ms. COOPER. You know, my—I will try not to be—I am a talker;
I will try not to be too long-winded. But my thesis statement in col-
lege was the working poor. And I am very much committed to peo-
ple who go to work every day, who work hard to care for others,
who fill a gap that is desperately needed to fill, who are still strug-
gling to make ends meet.
So for us, that is what drives me, my commitment to them. And
I know, you know, how important the work is that they are doing
but also the pride that they have in being owners.
The secret is that, that the worker ownership model creates a
culture in which people are proud to be here, proud to do the work
that they do. We are fully transparent as it comes to financials and
every other aspect of the business. The board is primarily direct
care workers. So, you know, the secret really is the culture. The se-
cret is the cooperative. The secret is the fact that when we send
someone to someone’s home, they can say, I am the owner of the
company and I am going to make sure that you get the quality care
that you deserve.
Mr. EVANS. Thank you, Ms. Cooper.
And I yield back, Madam Chair. Thank you for the opportunity.
Thank you.
Chairwoman VELÁZQUEZ. The gentleman yields back.
Now we recognize the gentleman from Pennsylvania, Mr.
Meuser, for 5 minutes, Ranking Member of the Subcommittee on
Economic Growth, Tax, and Capital Access.
Mr. MEUSER. Thank you, Madam Chair. Thank you very much.
I appreciate it.
It is an interesting hearing. We certainly all want responsible,
reasonable risk, that is, access to capital available to new entre-
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preneurs, current businesses, those businesses that are simply try-
ing to grow and expand. And you know what? Especially in some
areas where we need it most. I have many very stressed cities in
my district that I would love to see them have better access to cap-
ital, of course, more efficient and accessible.
Now, the cooperative formula that exists with the community
banks and the SBA can definitely be improved, but as we saw with
the PPP versus the EIDL, they were quite different, right, in the
outcomes. One had—one was effective. One was unbelievably use-
ful. One—you can’t even go anywhere in a chamber meeting with-
out those saying, hey, thank you for that PPP; it was everything
to us.
And then the EIDL, which was strictly run by the SBA—and I
appreciate the SBA. They were very helpful to us during the crisis
and all, but it was—it is high levels of fraud, right. So that is a
clear sign that that is not likely the best formula. The cooperative
between the community banks and the SBA shows to be a better
formula.
Now, it can be improved, right? I mean, you know, the whole PG
requirement, the personal guarantee being mandatory as opposed
to maybe only being needed when assets and collateral don’t stack
up for the loan to be made; be definitely made more efficient, as
Ms. Frazier and I were speaking about earlier. But without the co-
operative effort, we can see there is real serious fraud, okay. And
this isn’t just fraud from some large stockholders. This is the tax-
payers. And it is our responsibility to make sure that doesn’t hap-
pen. And some of the conversation going here, we are going to open
ourselves up to that.
Now, if you don’t have a personal guarantee, or a PG, there is
a likelihood, right, how the economy works, that the competitive in-
terest rates may be higher, more collateral requirements, perhaps
less loans, right. So there is some unintended consequences that
come with that, but that can be reviewed and be worked out as
happens. But why the leadership of the Biden administration for
SBA seems to want to centralize the authority within the SBA is
something, frankly, we should be very wary of.
You know, just quickly on the ESOP idea, you know, I know
many businesses that were ESOPs. Some did well; some did ter-
rible. You know, it is a big payday for the owners, by the way. And
then loans are made, and if that doesn’t work out, there is a lot
of false hope, and wishes and dreams can tumble down pretty fast.
So every business has to do what is best for itself, what is in its
interests. Many companies have options. Many companies have
partial ESOPs. Many companies have stock ownership plans, right,
and good retirement plans. So, now, why would those companies
be—not receive the same level of SBA resources and plans that an
ESOP would receive? So I have got a problem there.
So, Ms. Frazier, let me ask you, then, related to the PPP. Do you
believe that that went relatively efficient? And as well, if it weren’t
with your—some of the community banks’ oversight and credit cri-
teria, understanding and knowledge of many of the customers, of
course, how much different would it have been than what we have
seen occur?
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Ms. FRAZIER. Thank you for that question. Boy, that would—
a lot of speculation that it would be largely very different, but I do
believe the community banks were able to step up and really ad-
dress the concerns of the small business borrowers and address
their needs and work hand-in-hand with them to get to it.
I suspect if that program to have been a direct type of program,
it might not have been enacted as quickly and efficiently. The dol-
lars may not have been able to be distributed to the small busi-
nesses as quickly and their being able to survive, because it took
a lot of hands and a lot of dedication and commitment to make that
work.
Mr. MEUSER. I agree. We can’t put billions of dollars of tax-
payer money at risk.
So I yield back, Madam Chair.
Chairwoman VELÁZQUEZ. The gentleman yields back.
Now we recognize the gentleman from Louisiana, Mr. Carter, for
5 minutes.
Mr. Carter, you are muted.
Mr. CARTER. Thank you, Madam Chair. Greatly appreciate the
opportunity.
My question: Mr. Shorman, in my district, a large number of
small business owners are first-generation business owners, women
and/or Black. With the additional struggles facing these commu-
nities in accessing and maintaining capital, how do we make sure
that we know about ESOPs and other opportunities that employee-
owned business models have as an option?
Mr. SHORMAN. I think one of the things we talked earlier is
that is one of the directives in the Act is to be able to make sure
education is out there. Everybody knows you can sell to an out-
sider, you can transfer to your family, or you can just go out of
business. But being able to have that fourth option of transferring
the business to your employees is so important to be able to tell
that story. And if we can do that through the resources, whether
it be through the SBA and training them to say, here is another
option for you, that just makes so much sense.
And too many times I talk to employers who are—in fact, one
was in my office the other day looking to transition their company.
The ESOP was something completely foreign to them. And so I tell
the story about what is going on. We need to do that more and
more. We need to put that story on steroids, because those 2.5 mil-
lion tsunami out there who are transitioning their business need
another option, and employee ownership is one of them.
Mr. CARTER. So what more can be done to raise awareness
about the benefits regarding ESOPs and other employee-owned
business models? We know they are there; many people don’t know.
What can we be doing on our end specifically to educate minority
and women-owned businesses, in your estimation?
Mr. SHORMAN. Well, when somebody comes in, make sure the
SBA understands the importance and the value of that as well, and
that goes through training programs for SBA employees that are
in the field. That goes to making sure that the ease and access to
the system is there which you are working on to be able to find
ways for employee-owned companies to access the SBA, and then
that local community banker that is sitting over there. And I ap-
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preciate the comments earlier of how that local community banker
is connected to the community.
And while the person who is selling the business has a legacy
there, that local community banker knows who is involved and who
is a part of that company. That can’t happen on a national level
in Washington, D.C. It can happen if the SBA is required to allow
and look at loans from employee-owned companies and helping
them set that up as well.
Mr. CARTER. Mr. Shorman, I understand that Eagle Commu-
nications began the ESOP conversion process in 1998. It became
majority owned by employees in 2002, and 100 percent employees
owned in 2012. In your experience to ESOP conversions, what is
the biggest obstacle you have seen in your company’s struggle to
overcome and convert into an ESOP?
Mr. SHORMAN. Well, the biggest struggle out there is making
sure there is clarity of regulations. And the DOL has really been—
has really not put out clear guidance for that. And so when we
went through the process, we involved the best professionals so
that we were doing it right to get the job done, but we are a bigger
company. And at one point, we had 400 employee owners. We now
have just under 200.
And when you take that, you have to have a clarity of regula-
tions so that even the smallest companies understand what they
need to do to set up an employee-owned company and make that
happen, without worrying about regulatory issues that may come
and haunt them later on. We need clarity through the DOL to
make that happen.
We need to have a good path for economic value to be able to get
loans through the SBA, and then have that resource of tools so that
there is educational tools, like The ESOP Association, to be able to
help them get through the process and manage that and then have
a successful ESOP, because that is the goal, to have successful
companies that stay local and build their local communities.
Mr. CARTER. And, finally, as my time winds down, if there
were—if there was one thing that you could ask of this Committee
that would aid other small businesses out there that have not—
that either don’t know about ESOPs, have not had the opportunity
to utilize ESOPs, or what could we do as this committee to make
your life and any other small business owners better or easier to
access these resources?
Mr. SHORMAN. Well, I think this Committee can, in very spe-
cific terms, say that ESOP loans are available through the SBA,
because that would trigger a whole new effect. Right now, that is
not an option. I had a PPP loan. It worked great, and our local
banker did it. A local banker can do the same thing with other
local businesses there to be able to take and make that money
available so that an ESOP can be created. But somehow it gets lost
in the translation from the Committee to the SBA. So say, this is
what we want to have happen, and get it done.
Mr. CARTER. Thank you. I yield back.
Chairwoman VELÁZQUEZ. The gentleman yields back.
Now the gentlelady from New York, Ms. Tenney, is recognized
for 5 minutes.
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Ms. TENNEY. Thank you, Chairman Velázquez and Ranking
Member Luetkemeyer, and for holding this meeting. It is of great
interest to me as a small business owner. Our company is cele-
brating our 75th year in business this year. But let’s talk about a
little bit of reality today.
A lot of capital that is investment capital is highly concentrated
by geography, tend to be centered around big business hubs, urban
areas, like Boston, New York City, San Francisco, and leaves be-
hind much of the country, including my fairly rural and suburban
district. It also tends to flow disproportionately into high-tech in-
dustries and not into the manufacturing sector that are more cap-
ital intensive; obviously, great for creating jobs too because they
are more labor intensive; a lot more diversity in providing labor
across all sectors. And those tend to be really beneficial in my com-
munity where the industrial revolution was founded.
But in the absence of these opportunities in these rural areas,
and particularly in our area, as many of them have been forced to
shut down partly due to lack of capital and also due to what has
happened last year in upstate New York. My solution is to invite
all of you to co-sponsor—and some of you have, I appreciate it—
the American Innovation and Manufacturing Act. This bipartisan
legislation will allow the federal government to work with the pri-
vate sector to ensure these underserved areas, and especially man-
ufacturers who create things, are not left behind by today’s unequal
landscape. Also, it does not—it does so with strong safeguards. We
have put a lot of safeguards in place by protecting taxpayer funds.
And I think with this type of innovation, we can bring back good,
middle-class careers and by bring good-paying jobs across all sec-
tors.
And I wanted to point to one thing. I wanted to ask Ms. Frazier
a question. When we get to this direct lending and creating, you
know, we are all for ESOPs and, you know, employee-owned busi-
nesses, that is a great option, and to opening up the lending proc-
ess. Something in Ms. Frazier’s testimony really struck my eye.
And while we try to give more direct lending authority to the SBA,
she says in her testimony: While the SBA has the authority to
make direct loans, the exception disaster loans and micro loan pro-
gram intermediaries, it has not exercised this authority since 1998.
The SBA indicated that it stopped issuing direct business loans pri-
marily because the subsidy rate was 10 to 15 times higher than the
subsidy rate for its loan guarantee programs.
And I can tell you, as a small business owner, there is nothing
worse than killing entrepreneurship, innovation, and growth in in-
dustry than providing government subsidies and picking winners
and losers over other—in the marketplace. And I have been the vic-
tim of having competitors in the marketplace with government sub-
sidies. And we have been lucky to survive in some cases, but many
businesses cannot afford this unfair advantage.
And so I wanted to direct my first question to Ms. Frazier, and
I reference this as well, but let me—if you could just tell me a little
bit about 7(a) loans and tell us a bit about your business plan and
how to properly use a bank loan to fund their business. You also
guide them through funding and options. Do you think that this
partnership with a local bank or investment partner provides an ir-
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replaceable value to a business and increases its potential for suc-
cess? I know you are going to say yes, but I want to you to give
me some more reasons why, because if it weren’t for small commu-
nity banks, we wouldn’t even be in business today.
And thank you for your great testimony. I think it is really im-
portant. And if you could address real quickly what the subsidy
issue that I referenced in your testimony, that would be great and
just clarify that.
Ms. FRAZIER. Thank you. Maybe I can start a little bit with the
stories about how we help people and how we engage with the bor-
rowers—or the potential business borrowers. We spend time with
them in really figuring out what do they need. Because oftentimes,
as I mentioned, they think they need a term loan, something that
is paid out over 5 years, but maybe they need short-term working
capital, or maybe they need to buy equipment and they don’t know
how to pay for it, or they don’t know how much they can afford to
repay.
So the time our bankers spend with those businesses really edu-
cating towards what the options are, and then in sharing with
them how, maybe as they are starting out, they don’t have the cap-
ital to really go a conventional route, and how we can use that with
SBA to subsidize for them. And through PPP.
And, actually, we have been in existence for 150 years, so serving
the rural communities has been very important to us. What we
found is, is there is a great need for the 7(a) programs out in the
communities, and we felt it was our responsibility to dig in deeper
and made those investments.
If you think about the 10 to 15 times increase subsidy rate, I
would suggest that——
Chairwoman VELÁZQUEZ. Time has expired.
Ms. FRAZIER. Okay. Thank you.
Ms. TENNEY. Thank you so much. Maybe we can revisit this.
Thanks.
Chairwoman VELÁZQUEZ. Thank you.
Now we recognize the gentlelady from California, Ms. Chu, for 5
minutes.
Ms. CHU. Mr. Shorman, in addition——
Chairwoman VELÁZQUEZ. Ms. Chu, you are muted.
Ms. CHU. Mr. Shorman?
Mr. SHORMAN. Hi there.
Ms. CHU. Hi. In addition to being a Member of the Small Busi-
ness Committee, I sit on the House Ways and Means Committee
which has jurisdiction over issues affecting ESOPs. I am particu-
larly interested in the way the Tax Code discourages business own-
ers from agreeing to ESOP conversions, and most importantly, how
we can fix this.
Currently, only C corporations can convert to an ESOP, but
hardly any small businesses that organize as a corporation choose
the C corp structure. Instead, most will elect to organize as an S
corp because of the significant tax benefits for small businesses.
Congress could choose to extend ESOP eligibility to S corporations
in order to provide this option to more small businesses.
Could you talk about the impact that could have on encouraging
more ESOP conversions?
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Mr. SHORMAN. Well, it is going to open the door to a lot more
ESOPs because, as you know, and you mentioned the 1042 benefit
allows reinvestments of funds received from the sale of an asset
without triggering a taxable event at that time. And a large portion
of small businesses are sub S. Congress has made C corps eligible
for that 1042 benefit, and S corporations are ineligible. So Congress
could greatly incentivize the formation of new ESOPs by extending
that same 1042 benefits that are given to C corps to S corporations.
And with many small businesses out there, and we talked about
those 10—or 2.5 million baby boomers who have to decide what to
do with their business. If they are an S corp, changing that and
making it available for the 1042 benefit would greatly open the
door to a lot more possibility for employee ownership.
Ms. CHU. Thank you. And let me ask you about another issue
that owners face when they convert their business to an ESOP, and
that is that often they can’t meet the requirement to reinvest their
proceeds within 1 year of the transaction. That is because ESOP
conversions often take place over the course of many years because
owners are paid in seller notes. This has created a situation where
owners either miss out on the tax deferral that Congress created
to incentivize ESOP conversions or they purchase 1042 securities
that ultimately lose money but have a very, very long maturity.
So can you talk about how this 1-year window to reinvest pro-
ceeds impacts owners who decide to convert to an ESOP?
Mr. SHORMAN. That happened in our case, because we formed
our ESOP in 1998, but it was 2012 before we could purchase all
of that. And so there is that timeframe that takes place when a
seller will actually loan money to the employees to be able to buy
out that business.
So, really, what needs to happen, the law needs to be changed
so that the taxable event takes place when the transaction is fin-
ished, when it is completed, including full repayment of the seller
notes. Otherwise, it is a big penalty for that person who sells that
first year who may not even have the proceeds from the sale be-
cause that is going to happen over a period of years later. So that
is very important to take a look at and make happen.
Ms. CHU. Okay. And then there is a third issue. ESOP conver-
sions are disincentivized because owners are so limited in what
products they can reinvest in while keeping their tax deferral in-
centive. And, in fact, that is a big reason why so many owners are
pushed into buying 1042 securities, which are complicated, expen-
sive, and could end up costing them more money over the long run.
And many small business owners who might contemplate an ESOP
conversion are considering their retirement, but they can’t use the
proceeds to invest in a low-cost stable investment like an index
fund.
So could you—can you explain how allowing owners to invest in
mutual funds could make ESOP conversions more attractive?
Mr. SHORMAN. Well, I am a business owner/operator and not
necessarily a tax accountant. But, nonetheless, when you look at it,
you know, when you take your 1042 money, you want to have
choices to put it into. Right now, those choices are very specific. If
you could extend that to be able to do things like mutual funds as
a qualified investment, that opens the door for more people to be
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and feel good about making that transaction, making employee
ownership a possibility. And, frankly, by doing that, it would just
remove another impediment for more employee-owned businesses.
Ms. CHU. Thank you. I yield back.
Chairwoman VELÁZQUEZ. The gentlelady yields back.
Now we recognize the gentleman from New York, Mr. Garbarino,
for 5 minutes.
Mr. GARBARINO. Thank you, Chairwoman, and thank you to
the Ranking Member, for putting this on. And thank you to our
witnesses.
I have a question first for Ms. Frazier. In your testimony, you
state that waiving the personal guarantee would reduce access to
capital for firms. Why do you believe this is the case?
Ms. FRAZIER. Thank you for that question. I think we spoke
about waiving the personal guarantee. Oftentimes that is the in-
centive to continue to ensure that payments are made, and the
businesses run effectively to do that.
As regards to co-ops, we understand that those are very nuanced,
and so that needs to be looked at differently, and we would like to
collaborate for that specifically. But other loans, we really caution
against waiving the personal guarantees.
Mr. GARBARINO. All right. Thank you very much.
Mr. Shorman, in your testimony, you have discussed the lenders’
delegated authority. You even state that loans could take weeks or
months if they weren’t processed with delegated authority.
Why do you believe delegated authority is so important as op-
posed to loans being sent to the SBA?
Mr. SHORMAN. Well, Hays, Kansas, is a long way from Wash-
ington, D.C., and we would have to walk around a lot of streets in
D.C. for even people to know where Hays, Kansas, is. So for us to
apply for a loan that gets processed in Washington, D.C., in one of
the big, massive offices there, we know the difference. We have
seen that happen time and time again with things that we work
on.
If I can walk across the street, have a good community banker
that is interested in keeping us in business, keeping our commu-
nity growing, and I can tell my story to that local banker, and they,
in turn, are able—if they are able to process the PPP loan, as com-
plicated and as quick as that all happened, they ought to be able
to process an ESOP loan to be able to keep a company going or
allow that transaction to happen within the ESOP community to
grow ESOPs.
And so having that delegated authority, being able to transfer for
ESOPs just like other businesses, I can’t believe our local banker—
Ms. Frazier may say something different here, but I can’t believe
our local banker wants to make loans that aren’t going to work,
that aren’t going to keep that company in business.
So it would allow them and actually say, go do this versus saying
maybe go do this—go do this and loan money to ESOPs. It can be
a game changer for employee ownership for allowing those compa-
nies to have an option versus some of the others that aren’t so good
but having an option to keep that ownership local.
Mr. GARBARINO. I appreciate that answer, Mr. Shorman.
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Ms. Frazier, did you want to respond to that, or did you have
anything else you wanted to add to that—his statement or that
question?
Ms. FRAZIER. I think there is nothing a local community bank
enjoys more than help a business remain successful and operating.
Mr. GARBARINO. Oh, absolutely. We have a lot of community
banks in New York, and I have worked with them in my previous—
in my law practice, and they were very good at helping small busi-
nesses as well as homeowners and individuals. So I have nothing
but respect for community banks.
I don’t have any further questions. I yield back, Chairwoman.
Chairwoman VELÁZQUEZ. The gentleman yields back.
Now we recognize the gentlelady from California, Ranking Mem-
ber on the Subcommittee on Innovation, Entrepreneurship, and
Workforce Development, Ms. Young Kim, for 5 minutes.
Ms. YOUNG KIM. Thank you, Chairwoman Velázquez. And I
would like to thank the witnesses for being with us today.
You know, earlier this month, I had the opportunity to visit HdL
Companies that was located in my district, in
Brea, California. HdL is a pioneer and leader of auditing oper-
ations and revenue solutions for public agencies, and it has around
150 employee owners. So I saw firsthand the value that ESOPs
bring to our communities. And so I want to recognize how this
ESOP structure serves as an important tool for businesses owners
that are, you know, currently discussing and examining retirement.
So in order to encourage this model to be adopted and encourage
more employee ownership, as discussed already, I agree that we
can offer more educational tools and clarity.
But as we discuss access to capital, I would like to ask Ms.
Frazier, can you elaborate on how the personal guarantee allows
community banks to mitigate credit risks and increase capital for
firms? And then, can you also discuss how the SBA can make it
easier for community banks and other lending institutions to pro-
vide capital for ESOPs and other employee-owned businesses with-
out waiving the personal guarantee?
Ms. FRAZIER. Thank you. When you think about lending, there
are oftentimes a lot of factors that go into it, not only what—on a
business in particular, how the business is going to repay the debt,
but what happens when the business has a stumble or things go
awry for a period of time. And the banks, in a conventional way,
and SBA in this way also, rely on the owner of the business to step
in and make adjustments. And having that personal guarantee
holds them to the line of that, and so it is very important.
There is five Cs of credit, and one of those is character. And part
of that, putting your name on the bottom line of a loan saying I
will guarantee it is a sign of character.
In speaking about—I think the more we could collaborate to-
gether and discuss, not only how can we look at the guidelines
around the co-ops, but let’s look at how we can also collaborate
even more so to meet the needs of those small businesses and those
small loans. Collaboration would be important.
Ms. YOUNG KIM. Thank you for your response.
You know, clearly—can you hear me?
Chairwoman VELÁZQUEZ. Yes.
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Ms. YOUNG KIM. So we had a lot of discussion today about
clearly banks and credit unions and community banks are much
better equipped to service their communities than someone from
afar in Washington. And as you stated, Ms. Frazier, direct lending
through the SBA is not the answer to expanding access to capital
for small businesses or women and minority entrepreneurs. I agree.
The federal government does not have a good track record of being
responsive nor having good communications with our constituents.
So can you elaborate on how community banks and lending insti-
tutions are better prepared to detect and prevent fraud than direct
lending programs created by the government?
Ms. FRAZIER. Thank you. First of all, we are in the community,
so we know the businesses. We know the business owners. Often-
times, when new businesses are getting started up and those that
are seeking capital that might be eligible for an SBA loan, we can
visit them. We see them. And as mentioned earlier, there is noth-
ing like laying eyes on someone as you are evaluating their ability
to repay and their willingness to repay a loan. So I believe that
value that we bring to the table of being feet on the street in the
community helps prevent fraud in those areas.
Ms. YOUNG KIM. Thank you. You know, as a quick followup,
can you talk about how—or what the tools, like the know your cus-
tomer and the AML compliance, bring to the table in preventing
and detecting fraud?
Ms. FRAZIER. Certainly. The documentation that we research
and we bring to the table as far as even following up and making
sure that they have a certificate of good standing in the State, all
of those tools are pieces to validate that these are a credible busi-
ness and has been established appropriately.
Ms. YOUNG KIM. Thank you very much. I really appreciate the
interaction we had.
And I yield back my time.
Chairwoman VELÁZQUEZ. The gentlelady yields back.
Now we recognize the gentlelady from Texas, Ranking Member
on the Subcommittee on Oversight, Investigations, and Regula-
tions, Ms. Van Duyne, for 5 minutes.
Ms. VAN DUYNE. Thank you very much, Chairwoman
Velázquez.
As this Committee has heard countless times, access to capital
is essential for small businesses, but I can’t help but think that a
lot of the initiatives that are being put forward by the Democratic
Congress are detrimental to the goals of our nation’s small busi-
nesses. And this includes raising small business income taxes, cap-
ping the small business deduction, and raising capital gains and es-
tate taxes. All of this comes while small businesses still can’t fill
their labor needs and our supply chains remain disrupted.
As we proceed with this hearing, it is important to underscore
that it is not happening in a vacuum. There are very real harms
Texas small businesses will face should the reconciliation package
that Democrats are attempting to jam through become law. Accord-
ing to the Texas Public Policy Foundation, Texas businesses will
lose $663 billion in investments, corporate tax hikes will cut wage
growth by over 23 percent for employees, and international tax cuts
will reduce full-time employment by 12,000 jobs. This is nothing of
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the $12,000 reduction in median family income or the exploding
debt the average household will be expected to cover because of fed-
eral spending.
And, finally, I want to reiterate how disappointing it is to watch
Secretary Yellen skirt her legal obligations to come before this
Committee while small businesses in our community continue to
fight to keep their doors open. I will continue to ask, but I really
hope to see her before this Committee very soon.
I just have a couple of questions. Ms. Alice Frazier, thank you
so much for being here today. I have significant concerns about
how direct lending by the SBA. The SBA’s latest effort, EIDL, had
a large amount of potential fraud and the OIG reporting a possible
fraud rate of up to 30 percent. Knowing this, can you tell us what
the benefits are by including private lenders in small business loan
process? And why do you think this administration is trying to cut
private lenders out of the process?
Ms. FRAZIER. Thank you for the question. I am going to start
at the end. And I am not sure that I can answer why I think that
they are trying to cut it out of the process, but I would say that
having the private lenders, the community banks, banks involved,
this is what we have done. We have been doing it for years and
years. It is a good process that works today. We work effectively
with the SBA. And to change that process today, I am not sure
even the business owners or those that would utilize it would un-
derstand how it would work. And given their current experiences
with the programs, such as the EIDL, I am not sure they would
trust it as well.
Ms. VAN DUYNE. Okay. Thank you. As you know, access to cap-
ital is crucial, but capital for business owners today isn’t going as
far as it used to. So prices for goods across the board are up. We
have seen unprecedented number of cargo ships anchoring offshore
at our ports and shuttering of supply chains. And this administra-
tion is planning to increase taxes on small businesses.
So, in your view, how do these challenges affect small business?
Ms. FRAZIER. Oh, they are affecting things greatly at this point
in time. We have multiple committee-type meetings around in our
different local areas where we bring small businesses together, and
that takes up a good bit of the hour that we spend together. And
I think to elaborate not only the challenges with labor but the chal-
lenges of the supply chain and the fears that they will have in-
creased taxes has great concern for them.
Ms. VAN DUYNE. So you have talked to a number of businesses,
I am sure, over the last year. Do you have any specific examples
of how people who are either not as successful as they could have
been because of some of these policies or ways that they are not
currently investing because of threats of these policies?
Ms. FRAZIER. Oh, sure. I can tell you we have landscaping firms
that are unable to hire enough people to do the jobs that they have
actually been hired to do or contracted with. It might even be res-
taurants that have to close 2 days a week because they can’t hire
enough workers to remain open. The workers are overworked, or
even in such that cost of the food has gone so great, they can’t in-
crease their prices enough.
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One company that hires a number of workers that work remote
said that they hired 200 workers over a 9-month period of time to
retain 50. And so I think the——
Ms. VAN DUYNE. You said they hired 200 workers?
Ms. FRAZIER. Two hundred to retain 50 in that time period, and
it is just the transient nature. The way that labor is working today
has affected their business greatly.
Ms. VAN DUYNE. All right. I appreciate that very much.
I yield back.
Chairwoman VELÁZQUEZ. The gentlelady yields back.
Thank you again to our witnesses for joining us today. Your sto-
ries serve as a testament to the power of employee-owned busi-
nesses and all they offer the labor force.
If we generally want to help the American people build back bet-
ter, we must promote policies to empower American workers. Em-
ployee-owned businesses merge ownership and employees’ inter-
ests, helping to create a symbiotic relationship where everyone
thrives. As ESOPs and cooperatives become more prominent, the
American workforce will benefit.
I ask unanimous consent that Members have 5 legislative days
to submit statements and supporting materials for the record.
Without objection, so ordered.
If there is no further business to come before the Committee, we
are adjourned.
[Whereupon, at 11:56 a.m., the committee was adjourned.]
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46
SBD026 with DISTILLER Insert offset folio 46 here 45635.010
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47
SBD026 with DISTILLER Insert offset folio 47 here 45635.011
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48
SBD026 with DISTILLER Insert offset folio 48 here 45635.012
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49
SBD026 with DISTILLER Insert offset folio 49 here 45635.013
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50
SBD026 with DISTILLER Insert offset folio 50 here 45635.014
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51
SBD026 with DISTILLER Insert offset folio 51 here 45635.015
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52
SBD026 with DISTILLER Insert offset folio 52 here 45635.016
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53
SBD026 with DISTILLER Insert offset folio 53 here 45635.017
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54
SBD026 with DISTILLER Insert offset folio 54 here 45635.018
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55
SBD026 with DISTILLER Insert offset folio 55 here 45635.019
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56
SBD026 with DISTILLER Insert offset folio 56 here 45635.020
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57
SBD026 with DISTILLER Insert offset folio 57 here 45635.021
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58
SBD026 with DISTILLER Insert offset folio 58 here 45635.022
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59
SBD026 with DISTILLER Insert offset folio 59 here 45635.023
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60
SBD026 with DISTILLER Insert offset folio 60 here 45635.024
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61
SBD026 with DISTILLER Insert offset folio 61 here 45635.025
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62
SBD026 with DISTILLER Insert offset folio 62 here 45635.026
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63
SBD026 with DISTILLER Insert offset folio 63 here 45635.027
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64
SBD026 with DISTILLER Insert offset folio 64 here 45635.028
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65
SBD026 with DISTILLER Insert offset folio 65 here 45635.029
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66
SBD026 with DISTILLER Insert offset folio 66 here 45635.030
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67
SBD026 with DISTILLER Insert offset folio 67 here 45635.031
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68
SBD026 with DISTILLER Insert offset folio 68 here 45635.032
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69
SBD026 with DISTILLER Insert offset folio 69 here 45635.033
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70
SBD026 with DISTILLER Insert offset folio 70 here 45635.034
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71
SBD026 with DISTILLER Insert offset folio 71 here 45635.035
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72
Æ
SBD026 with DISTILLER Insert offset folio 72 here 45635.036
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File and source
- File
- CHRG-117hhrg45635.pdf
- Size
- 17,591,992 bytes
- SHA-256
- 9e4f858c41c499f6eabf143d79ad8264b32432dcb46d68ff1029e0aa52867cc5
- Our copy
- CHRG-117hhrg45635.pdf
- Original
- www.govinfo.gov