THE WHITE HOUSE
Office of the Press Secretary (Manchester, New Hampshire)
REMARKS BY THE PRESIDENT IN ROUNDTABLE DISCUSSION ON SMALL BUSINESS POLICIES New Hampshire Hydraulics Company Merrimack, New Hampshire
1:40 P.M. EST
Q Well, Mr. President, I'd like to welcome you to New Hampshire Hydraulics, and to all the employees here with their families and friends, we're very pleased to have you here and to have an opportunity to tell you a little bit about how SBA has helped my company and some of the other businesspeople here, and we hope that would continue in the future also.
My particular part and role with SBA has been the business in the '90s, the beginning of the '90s was such that with the bank closings and that type of thing, I was one of the unfortunate ones that got caught up in that bank issue in the early '90s and the SBA was there to get me out of that, help me get some financing and get the business back on track after just being on hold for a couple of months.
Since that time we've gone from 20 employees -- to this point in time we have 35 employees. We offer health insurance to everybody. I feel it's a good paying type of job for everyone, and we're in a position now to move forward into the future in this company in this setting with a second SBA loan, which allowed me to move into this building from my 3000 -square-foot building I had earlier.
So I'd just like to say I appreciate SBA being out there, and I think it does businesses a lot of good. And that type of program, I think, to help small businesses is what we're interested in seeing more of, if possible.
Thank you. (Applause.)
THE PRESIDENT: Tony, I'd say you've seeded this crowd pretty well. That's what all of us politicians try to do, we try to go to crowds where the people are going to cheer for us. You did a good job.
Mr. McGowan, do you want to say anything?
Q Welcome, Mr. President. I think this is a session that we really need to have today, to let you know what's going on. Ellen has a great start-up business up the road that was waiting alone during the shut down of the federal government. We've talked about all of the problems that we've had.
Everybody in this group has sat across from a banker and been refused a loan in the course of their business history, including me, and I think that's part of what we need to do as a government to make our programs more user-friendly, that's what you told us to do. We did over 700 loans in this state last year, and it has made a big difference. Ellen's program was done on our LowDoc application, which is the two-page application.
Q Yes it was. I went to the bank, everything he went through, all my application -- with a fine-toothed comb. It was approved. The day after he did that, the government shut down. So I was in a holding pattern. I had inventory coming in. I had rent paid on an empty store. I was anxiously awaiting to hear.
THE PRESIDENT: Tell all the people here about your business, first.
Q Tall women's clothing store, if anyone had anyone hadn't guessed -- in Concord, New Hampshire. Specifically for anyone 5'9" and taller. There is no other one in Northern New England. I know there's a need for it, convinced the bank of that need and just waited for the shutdown to end.
And when it did, I shall say, the SBA was wonderful. My loan went through in a day-and-a-half; it was terrific.
Q Mr. President, my family runs a country Inn and restaurant in Henniker, New Hampshire, the Meeting House Inn, and we have 14 employees. And we have some mighty fine food there, Mr. President, mighty fine. (Laughter.)
Mr. President, small businesspeople often find themselves squeezed from many directions. It's kind of like an orange, and sometimes we don't have much juice left to give. We'd like to provide benefits for our employees, but there's really not that much there to provide them in terms of the money in income.
Specifically, when you pass the national health bill in your next administration -- (applause) -- we are all for that and we're very excited about it. We just want you to keep in mind that, for instance, in my business there's only two to three cents on the dollar that we're able to keep for ourselves and to plow back into the business. So we certainly hope that you will keep us in mind when that's passed, in terms of how we pay for such a bill -- whether it's how we pay the provider or if we pay some fund that the government oversees. We hope that you'll keep us in mind.
Q Mr. President, my name is Curtis Lloyd, I have a business called Aviation Technology. We make ground support test equipment for aircraft. This year, we are in the middle of about a 75 percent increase in sales, in this year alone. And the difficulty that we've run into is the SBA is limited in what they can guarantee in loans to us so that I'm actually in a position where I have to refuse some business because I can't get financing to build the equipment because we're still too small and not financially strong enough to be bankable without SBA support.
The SBA has been a wonderful support to us for the last couple of years, which have been very difficult. And we wouldn't be here today without them.
THE PRESIDENT: So, it would help you if the SBA could guarantee a larger size loan?
Q Absolutely. They're limited $750,000 whereas the -- we also bid on government contracts, we sell equipment to the Federal Government -- they consider a small business anyone under 500 employees, $750,000 is only enough for a very relatively small business. We're starting to grow and we want to get bigger and suddenly we're left kind of sitting and waiting, not knowing what to do with no money available to help us grow.
THE PRESIDENT: And what would be the size loan that you think that we ought to look at? Let me back and say -- you know how the SBA program works, the SBA loan guarantee program works, and one of the things that I'm proudest of about our administration and all this work we've done to try to give the American people a government that costs less and does more is that we have reduced the budget of SBA by about 40 percent and we've doubled the loan volume.
But one of the things that we were compelled to do, given the budgetary situation we were in, is to go from a maximum loan of -- I think it used to be $1 million down to three-quarters of a million. But what I gather you're saying is that you need a bigger one even than that. You think there should be some sort of a program for non-bankable loans for a modest-size business that goes up to, what, $2 million?
Q $2 million would be enough to get -- at least in my business and from what I've seen, get us, small business owners, over the hurdle to then where we're then strong enough to be bankable without an SBA guarantee.
Q Mr. President, for a time we had to go to a half a million dollars because programs were so successful. We went from -- in 1992 making 26,000 loans to over 56,000 loans last year, mostly because of our two-page loan application that's user-friendly. We had to put those restrictions on because of the Congressional appropriation.
THE PRESIDENT: But I think, you know -- again, this is the sort of thing that I hope will come out of this budget debate, that is, it seems to me that you can conclusively demonstrate that the SBA has done what the taxpayers wanted. We've cut the cost of operating the program. We have now more than doubled the loan volume, you just heard him say that. And the only reason we had to change the ceiling is because we wanted to accommodate as many people as possible. So, it may be possible now to go back and say we ought to go back and say we ought to have a bigger loan volume ceiling because our administrative costs are very, very low.
And we have -- the form used to be an inch think and it used to take five or six weeks to approve. And now with the Lowdoc program it's just one page, either side, and we try to give just a couple days turn around; and it's been very well received.
Q Yes, it has. One of the recent changes I've also seen is that the fees have been increased. And, personally, I don't have a problem with that and most of the people I know don't have a problem with that, because without the program we wouldn't exist. And if it's going to cost us a little more, we're all for it. It keeps us going.
THE PRESIDENT: By increasing the fees, what that's enabled us to do is to run the program and continue to maintain a high volume of loans while we're reducing the deficit. And by charging -- getting a little more of the fees we can still fill that gap between the banks -- you know, where you can't get the bank loans, and still the borrowers come out ahead in it, financially.
So we went out and sampled, sort of, the small business community and asked them, how about this, because this way we can keep volume up even as we're bringing the budget deficit down. And I'm glad you said that, because you're the first person I've had a chance to ask since we did it. I didn't know if I'd be dodging hydraulic equipment or not. (Laughter.) Thank you.
Q Hi. My company is the Delahaye Group, and we analyze the image of corporations and politicians. We, in fact, did yours on the Internet last night. I'll give it to you later, it's great, very good.
But what's happened to us was that we moved -- I moved the business up to New Hampshire and it was very difficult to get loans. Originally -- finally was able, because I had some personal securities, to get that loan. And I sort of wish that there was a way that the SBA could come in when you're smaller. Small CAB programs that people are doing in -- I mean, we're helping establish in foreign countries, I think, we could almost in fact use here. We've doubled our -- you know, $500 loans are doing great things in developing countries. And, I'm very fortunate now, we've doubled in size since you've come on board. I mean, it really has been -- we've done very well and we've gotten SBA loans and we've moved into beautiful headquarters, but I wish it had happened a little bit earlier. Those first three or four years were really tough.
THE PRESIDENT: If I could just interject here. The general title of what she's talking about, getting very small loans to start businesses is microenterprise loans. For many years our government -- which believe it or not only spends one percent of your tax dollars on foreign aid, contrary to popular belief, we have the smallest foreign aid program as a percentage of our budget of any advanced government in the world -- but we have gotten a lot out of it.
Because, among other things, there's a country in Central America where, a few years ago, in cooperation with some American religious groups that were operating development programs, we put $1 million into a small loan program. The average loan program was $300.
Now, in that country, in terms of the per capita income it would probably be about, say, a $2,000 loan here, that would be about the equivalent. But, anyway, over the next few years that $1 million generated enough business loans to create 43,000 jobs, which is one percent of the total employment in that country. Everybody paid the loans back with interest, there's now $4 million in that account that started off at $1 million. My premise is, if we can do that in another country, we ought to do that in our country, and that in the inner cities, in these very isolated rural areas where the per capita income is low and the unemployment rate is high, I believe we should be making those kinds of loans.
So we have -- another part of our economic outreach to small business was a fund called the Community Development Financial Institutions Fund, CDFI. And if it survives this budget round, what we're going to try to do is to get banks to establish themselves with branches in areas where there's very high unemployment, low per capita income, and make these kinds of loans to try to set up businesses. They can also make conventional small business loans as well.
But I think for a little bit of money, you can do a huge amount. We established a bank like that in a rural part of my state when I was governor, and my wife went on the board of the bank and we modeled it after the only American project I know of, which was a bank in Chicago which helped to redevelop the South Side of Chicago by making small loans to individual carpenters, individual electricians, individual builders, and then they went in and took all this decrepit housing, rebuilt it and got middle class people and poor people to live together, and totally turned around a neighborhood. So I'm glad to hear you say that, because there's not enough government money to rescue the inner cities and the isolated rural areas, but free enterprise could do it if we did it in this way.
You're the first citizen that had never had a direct contact with this program overseas that ever suggested it, but it looks to me like if we're financing small businesses in another country like -- we ought to do it here in our country; we ought to give the Americans the same break that other people have.
Thank you. (Applause.)
Q I have to agree with her -- not only microloans, but lines of credit so that particularly small businesses like myself, which was two people at the beginning of the year; we're up to five people now, a 60 percent increase in sales -- but we're living on credit cards right now, because we can't get even a simple line of credit. After five years in business, proven record, we should be able to get something like that.
My real question, Mr. President, is -- and I tried to think of something that nobody else would think of, and -- (laughter) -- as a small businessperson, we've heard from Washington that more power should be given back to the states and to local governments, and that people should be more responsible for themselves -- businesses responsible for their own communities. And while I agree with this premise, my concern is, my business is very involved in the arts -- we're a florist shop, Marshall's Flowers and Gifts, so we're very artistically involved. And I give five to 10 percent of my gross sales to nonprofit organizations -- mostly arts organizations. And that's a lot of money.
And when I hear Washington say, you've got to do more, you've got to give more money because we're going to pull our federal funding and you've got to fill the gap, I know we can't. I sit on the board of directors of the Granite State Symphony Orchestra, and I've asked my business associates, can you give more money to the arts? They can't. They're cutting back right now.
I went to State Arts Council -- can you give us a technical assistance grant, just $750; I'll match it with $250, they said we can't. We've had a 39 percent cut in our funding. So my concern is, as I look, I have small children, two small children. I look to the future -- who will support the arts and the humanities and the culture and the history of our nation if it's not the federal government? It's not a profit-making thing, and businesspeople can't be expected to support it all ourselves.
THE PRESIDENT: Well, you making that argument to me, you're preaching to the choir, because I agree with you. But I would like to put it -- just briefly, I'd like to put this in proper context. Let's just take this as an example of the budget debate we're having in Washington everywhere. You should know, first of all, that the deficit has been cut in half in the last three years. What makes the deficit go down in a hurry is if you have a combination of real discipline on the money you spend and a growing economy. Because if you have a growing economy, then unemployment's less, the government has to make fewer payouts -- for example, in the last three years the welfare rolls are down, the food stamp rolls are down, the poverty rolls are down. We're not paying out as much money because the economy is in better shape, more people are working. And we have pretty tight controls on the spending.
We have reduced the size of the government by 200,000 since I've been in office. Your federal government is now the same size it was in 1965. We have cut 16,000 of the 86,000 pages of federal regulations, including half the federal regulations in the SBA -- 50 percent have been slashed. So we're trying to get rid of all of the inessential things and all of the waste.
Now, there's a big debate now of what should the national government do. And you can make an argument, once you get beyond national defense -- defending the country, you can argue that nothing else should be done, or you can argue that it should be done. How do you decide? I believe we have to ask ourselves: What should be the role of the federal government? My view is, when you move beyond national defense, our role ought to be to focus on problems that are national in scope, but if they have to be dealt with at the local level we should be focused on helping individuals and families make the most of their own lives or enabling communities to address these challenges.
Now, the reason I have favored continued federal funding of the arts is that once you get out of the really big cities where there is a massive amount of wealth and a huge population base to attract the orchestra, the art gallery, the you name it, once you get out of that where they don't have a big population base, isn't it still a good thing nationally for people in small rural towns in North Arkansas or Northern New Hampshire to have a traveling artist, or to hear musicians directly, or to be exposed to these things. I think it is. It's a tiny part of our national budget, so what I have proposed is sort of a split in your position and theirs.
I said, we can't increase this right now until we get the deficit under control, so let's just flat fund it, but let's keep it flat for several years so at least we can tell the local arts council in Merrimack, okay, this is what New Hampshire will get next year, the year after and the year after, and you can plan accordingly; and that's what I hope we will do, and I think there's a fair chance that's what will happen.
Q I understand, Mr. President, that only .68 per family, per year, is spent on the arts by the federal government?
THE PRESIDENT: That's right. Most of your money -- let me just say where most of the money goes. Most of the money goes to Social Security, national defense, Medicare, interest on the debt -- you know, from accumulated debt -- in the past, we quadrupled the debt in the 12 years before I became President --we didn't have to make interest payments on the debt that was run up in the 12 years before I took office, the federal budget would be in surplus today -- not balanced, in surplus. So we've got to get the deficit down. You've got to get the debt down, because otherwise the interest payments eat you alive, just like your home mortgage payments or anything else.
Those things are the lion's share of the budget. Everything else you think about being in the federal budget -- I mean, the National Parks, the highway system, you name it, everything else -- the Labor Department, Small Business is only about a third of the budget, actually, slightly less. So, you're right, the arts funding, it's quite small.
Q My name is Nancy Sampo and I'm the owner of Enviro-tote. Since we met five years ago, Enviro-tote has almost tripled its sales and we've doubled our employees that work for us. We are another SBA success story. So, thank you very much. (Applause.)
THE PRESIDENT: Tell them a little about your company. This illustrates another point I've been out here on the stump making in New Hampshire and around the country.
There is still a huge debate in Washington that I believe we should have resolved by now about whether you can grow the economy without hurting the environment. There are a lot of people who still assert that you have to have a certain amount of environmental degradation to have an acceptable amount of job creation.
I think you can argue that -- I think you can argue that your business is good for the environment; right? Because what you're doing here is you're recycling, you're repairing, you're minimizing the use of raw resources. I think that -- my own view is that in the United States and every other advanced country in the world, we have to find ways to try to grow the economy while we nourish the environment. That's what her business is about. So, just give them a couple of minutes about that. I think that's important.
Q We manufacture environmental tote bags and we make them out of unbleached cotton and we print with nontoxic inks. When the company started five years ago we started marketing to college bookstores because we saw a need there. On average, every student uses three plastic bags per semester so it was a niche for us where we could go in and say we came up with a great marketing idea: put the university logo on a bag for about $2, rent the bags to the students and eliminate almost 65 million bags nationally going to the landfills.
And this was an idea that caught on. The last few years the environmental issues have not been in the forefront of students' minds but we have 40 people in my company that are reusing tote bags every time they go to the grocery store. If they just tell one person, if every student just tells one person what they're doing, then it is a company, a New Hampshire-based company, that is growing that is helping the environment in a very small way, in a very easy way. But it is helpful.
My concern is with welfare reform. If you don't mind, I want to read it so I get to the point. Like I said, we are a manufacturer. We employ semi- and unskilled people. We have a very hard time finding people to fill these positions. I feel that welfare could be reformed to provided businesses with this type of labor force.
THE PRESIDENT: I agree with that. Let me give you one -- first of all, now that the New Hampshire unemployment rate is down to about 3.2 percent, all the economists say that at any given time in a country like ours 3 percent of the people will be walking around somewhere. That will be -- you know, they'll be moving home with their parents, they'll be moving to another state, something will happening.
So, when you get an economy down to 3 percent or a little below -- there are two or three states that have unemployment rates below 3 percent, but it's very difficult to get below 3 percent, so the labor markets get very tight. So, then the question is: How do you move people from welfare into the work force? I think the rules have to be changed to put time limits on welfare for anybody that can go work that has access to a job. I think they are entitled to some support. I think that the problem is, if you take a job and you have very low wages and there is nobody giving you and child care help, you may actually lose ground. Of, if your child loses Medicaid health insurance coverage because you go to work that's tough.
But one of things that -- this started in Oregon --we have given 50 experiments -- freedom from federal rules and regulations in 35 states to try to move people from welfare to work. One of the things that I think all of the low unemployment states should consider doing is what Oregon has done -- we gave them permission to do this -- they have the right to take the cash value of the monthly welfare check and the food stamps and give it to the employer for six to nine months as an income supplement to hire people off welfare. So, people have to work for the money. They're going to get the money anyway but now they have to go to work for it and it's recycled through the employer.
You have to give them, I think, a little more than that. But you would have to anyway, just to meet the minimum wage requirements. But, still, it's a subsidy that you get for six to nine months, that you can decide whether to keep the employee or not. But then by that time, the employee's acquired work experience, the confidence of going to work every day, something you can put on a resume. And I think it is probably the quickest, easiest way to move people from welfare to work in areas that have low unemployment.
In areas with high unemployment, it won't work and people would be upset because they'd be, you know, you'd be picking employees over another. But once the unemployment rate gets pretty low in a given area, I think it's one thing that would really make a huge difference. And I think we've got four or five states that are trying it now, and I'm trying to urge everybody to do it. When I spoke in Vermont last year, I spoke to the governors and I said, there are five things that if you will do with your welfare proposal, these five things will give you immediate approval. And that's one of the things that I'd like to see done. And that would give small businesspeople like you the opportunity to deal one-on-one with people who are moving from welfare to work, you'd be able to teach them things about the work force, you'd be able to -- you know, even if at the end of the period you decided you couldn't keep them, it could make a big difference in their lives. So that's one of the things.
And if the version -- if what I'm asking the Congress to do, or some variation thereof passes in welfare reform legislation, then the states would automatically be able to do this; they wouldn't even have to ask us for permission. I wish they didn't today, but under the present law they have to.
Q Mr. President, in reference to that, I have an unwed teenage mother who works for me, and she does work and she is finishing up high school, I'm pleased to say. And when her baby was born, she went to get some health care for her baby from the government because we do not offer it at my business, we cannot afford it. And she was told she could not have that health care insurance unless she went on full-blown welfare, which she did not want to do. Is there any way that the programs can be split?
THE PRESIDENT: Yes. As a matter of fact, this is -- ironically, again, these are just glitches in the law, that's why I'm trying to pass a law, because otherwise you have to do it state-by-state. If that same woman had gone on welfare for 30 days and then come to work for you, she could have kept her Medicaid for, depending on what the state does here, but for a minimum of nine months, a transitional period -- because we never want to discourage anybody.
You can't ask anybody to hurt their children. In the perverse world we live in, a lot of small businesspeople can't afford health insurance. So if you're on welfare, your kid has Medicaid. And then if you go to work, you lose the health insurance for your kids and if you make $4.25 an hour -- which is what the minimum wage is, I think it should be higher, but there it is -- and your child gets sick and you don't have health insurance, then all of a sudden your income is much lower than it was if you were idle.
So under the law now, that young woman, had she drawn one welfare check, could have then come to work for you and in every state gotten to keep that Medicaid coverage for her children for some time, for her child for some time. And in some states, over a year.
So what we're trying to do is -- let me just give you -- one of the things that we could give a state permission to do is to let someone immediately go to -- you're the first person who has ever told me about this incident; I've never heard this example before -- but we could give, easily give the state permission to just tell people like you, you can hire them before they ever have to go on welfare, but if they would have been on welfare otherwise, maybe their income level, we'll deem their income level to be what it would have been and for a few months they can be covered.
If our welfare reform legislation passes, then the federal government would be out of that and the state could just make a decision to do it, which is what I would like to see happen.
The real problem in all this welfare business is --besides developing sort of the self-esteem and sense of responsibility of people on welfare -- most people on welfare would like to work. And most people on welfare are not better off financially not working. The problem is that welfare, real welfare payments in almost every state in America are lower in terms of what they'll but than they were 20 years ago. Welfare, per se, is not a good deal. What helps you is the Medicaid for your kids and the fact that if you're home you don't have to hire anybody to do child care.
Those are the big barriers to moving people from welfare to work. And if we can overcome them, if we could have very tough requirements requiring people to work if they want to get any help. I think that's what we ought to do, but I see all your employees have got their kids here today, what we want for America is for everybody to be successful as a parent and successful in the workplace. And we don't want people to have to choose one over the other. We want people to succeed at home --that's the most important job any of us have -- and to succeed in the workplace.
Q Child care is really a big issue. I hire minimum wage folks and, you're right, at $4.25 an hour they cannot afford child care. And as part of the White House Conference on Small Business, and you got our 60 recommendations and I'm pleased to hear that you talked about us in your State of the Union Address, the women business owners felt -- and those of us who hire, you know, the minimum wage people felt that there needs to be some sort of either business incentive program or assistance program that we can allow our employees to work and have child care. We don't know how to accomplish it, but we wish there were something out there for that.
THE PRESIDENT: Let me just make a suggestion, all of you in this. This is something that you might -- you don't have to have a specific answer, but if you feel this way and if the small business community in New Hampshire feels this way, one thing you could do is just write your senators and your members of Congress and tell them that. Because we're having two debates over tax cuts in Washington. One is: how big a tax cut can you afford if your first job is to balance the budget. But the second is: let's assume we agreed on how much we could afford, what kind of tax cut is best?
My belief is that the best kind of tax cut is the kind that helps people raise their children or educate them, or that helps businesses deal with the family-based problems or the education problems they have with their own employees. So I would -- for example, I'd be more than happy to have a really significant increase in the financial incentives we give to small businesses to help their employees with child care. And I think most families with children would be better off having a tax deduction for the cost of sending their kids to college than having what would be a much smaller across-the-board tax cut.
But these are the decisions that we have to kind of grapple with. And let me give you another example. The White House Conference on Small Business said we ought to do something to make it cheaper and easier for smaller businesses to take out pension plans for themselves and their employees. So we've got a bill in Congress now that would make it possible for businesses with five, ten, six, fifteen employees less expensive and more reliable to take out pension plans, for the owners and the employees.
These are the kinds of things we're going to have to do if more and more jobs are going to be created by you and more and more jobs are going to be abolished by big companies. Because big companies could do this on their own, they could have good health care, they could have a good pension, they could have continued education benefits. But people will still need them if they go to smaller companies. So if the big companies aren't going to be there to aggregate the money, then the government has to come in and help give some incentive or support to small business to do the same thing.
Q Mr. President, John Bresler. I run a textile factory in Suncook, New Hampshire, and without the SBA local development authority the banks wouldn't have stepped up and helped us grow.
We took over a failing business. We injected our own money. We confined them that we could run a business and they came to the table and said, okay. Since 1989 we've tripled our volume, we employ 50 people. We appreciate your support for small business. But I've got kind of good news/bad news situation. The bad news is, I'm in the textile business. And since NAFTA has come on board, we're competing with .54 an hour labor in Mexico. We wish, number one, that Mexican employees would have the same guarantees for good working conditions, health insurance, clean water and air, that our employees get in the United States.
And we'd like to make a suggestion that to help with job retention there could be a low cost loan fund set up, perhaps funded by five or 10 cents for each garment that comes in under NAFTA, because if everyone in this room checked the labels which we manufacture, or attempt to, in their clothing I would assume that less than 70 percent of it was made in the United States, maybe less than 30 percent of it. So we understand, intellectually, the value of NAFTA and the value of developing our hemisphere and having Mexico rise up from its knees.
But intellectually and economically are two different things. We're getting killed in the pocketbook.
THE PRESIDENT: You know, first of all, I'll look and see what the possibility of that is. That's a good idea.
NAFTA was the first trade agreement ever that actually required any country to meet certain labor standards or environmental standards. And one of the -- we have slowed down some of the compliance with NAFTA, like on truck safety and all, because we think it's so important to see that these standards are met. And we think it's so important to see that these standards are met. In fairness, they are very difficult to impose and enforce, as you know. I honestly believe that it's a good idea. I don't think we should be subsidizing people to live substandard lives. What we want them to do is to raise -- lift our standard of living.
Q We know it's easier to run a truck to Bentonville, Arkansas -- I believe the headquarters of WalMart -- than it is to send a boat from China. We do see the value of the clothing being made here. There is less oil used to bring that clothing to market so there is less pollution and there is less cost. Let's make sure that the American workers get a fair share under NAFTA.
THE PRESIDENT: Thanks. Give him a hand. (Applause.)
Q We are big supporters of you, Mr. President.
THE PRESIDENT: Thank you. Q So you are not going to lose our vote over this but we
think it's a critical issue.
THE PRESIDENT: Thank you. I appreciate that.
Q My name is Ken Solinski. I'm with Inside Technology. We are a manufacturer of night vision electro-optical equipment, principally things like infrared aiming lights and night-vision goggles which our military is using throughout the world. In addition, we export our products with State Department and DoD approval. It's covered by ITAR to NATO and other friendly nations. Our equipment is currently being used by Canada, France and Britain in Bosnia as well; needless to say, helping balance the payments.
We started in 1988 with less than three people and we're up to 87 people right now. I would like to talk to you about one thing, in specific regarding tax and it's fairly a narrow subject so please bear with me.
Prior to 1986 on long-term manufacturing contracts, one was able to use an accounting principle called completed contract method of accounting, whereby at the end of a contract you would look and see what kind of profit and you would pay tax based on that profit. It seems like a very reasonable thing to do and we're certainly willing to pay tax on our profit.
But with the Tax Reform Act of 1986 there was a change in the law that said that on long-term manufacturing contracts you have to use a percentage of completion method of accounting. What that means is that if you incur 50 percent of your cost on a program you have to pay tax on 50 percent of the estimated profit. What that means is that when you're fortunate enough to get a long-term manufacturing contract, you typically spend the first year on non-recurring costs, things like tooling special equipment, training of new employees and qualification of the product.
During that first year cash flow is a severe issue because you're spending all this money on non-recurring costs and generally getting little, if any, revenue to show for it. But if you're saying that you're going to be profitable, then you have to, at the end of that first year, pay tax on 50 percent of that projected profit if you've realized 50 percent of the cost.
I have no problem paying tax, Sir. I would just like to have the opportunity to get the money in terms of revenue, let alone profit, before being asked to pay the tax. I think that's something that, you know, prior to '86, companies were allowed to do. I think there was some abuses of that policy, particularly large businesses who kept contracts technically open on loopholes, if you will, to delay the tax for a very long period of time. But I think the way that loophole was closed, particularly for small businesses who are dealing with cash flow issues, it makes it very, very difficult to -- you basically have to go to the bank to borrow money to pay the tax on revenue that is two years away from you yet.
THE PRESIDENT: Let me ask you something. Could you write that up for me, or have you written it up for me? I would be glad to look into that. (Laughter.) You know exactly what happened. What happened was they had all these big companies with multiple, multi-year contracts so they were always rolling their costs over to look like they were complying with this contract and that one and the other one, and never paying the taxes on the profits they were earning.
Q I understand, and that door should have been slammed shut, and I'm glad to see that it was.
THE PRESIDENT: But what we ought to be able to do is to say that, at least in the years when you realize no net gain, in the early years of a contract, you shouldn't be subject to taxation.
Q What happens to us it we'll get like a $2.2 million contact, let's say, $200 thousand of profit, $2 million of cost. The first year we spend tooling up, getting people in place, training them, facilitizing and so on. We've spend $1 million. We then say we've incurred 50 percent of our costs, and then we're asked to pay 50 percent tax on 50 percent of the profit which is three years away.
THE PRESIDENT: That's why people want to change the tax system. That's good. Thank you.
Let me ask you a general question, if I might, and get you to comment on it. When I was here in 1992, the biggest problem small businesses were having was that all the banks were shutting down, so nobody was making any loans. And you didn't have any bank failures last year, and that's good.
One of the reasons we really tried to turn up the capacity of the SBA to make loans is, we were afraid as the banks worked their way out of the last recession, with the particular impact it had on the banking industry, and more in New England than almost any other place in the country, if we could find a way to give more SBA loans and -- even while doing our part to cut the costs of government, that would make a real difference.
We also were asked to do two other things, one was to increase the expensing provision. I'd be interested to know if it has benefitted any of you. You know, we -- the expensing provision when I took office gave you the right to expense $10,000, now its up to $17,500. The NFIB asked for $25,000, and I tried to get that in '93, and I think that may well come out of this present tax law. Would that make a difference to you? Is that important part of the Tax Code as far as you're concerned?
Is the bank loan situation, now measurably better than it was in 1992, and if not, what else can we do about it? I'd like to ask those two questions.
Q Having just closed on a loan about a month and a half ago, yeah, it's definitely banking situation is enormously improved. And whether it is the LowDoc situation, or whatever, things are moving a whole lot faster. Now, of course, the issue, of course, is getting people into the business fast enough.
One of the issues, certainly in New Hampshire, with low employment, is getting people hired and trained and educated and everything else. Yes. Expensing would make a huge difference because it --
THE PRESIDENT: But it has -- when we write --
Q It hasn't yet --
THE PRESIDENT: -- 17, you haven't felt it?
Q No, not just filing taxes -- I mean --
THE PRESIDENT: So you wouldn't -- under the old system?
THE PRESIDENT: But for you, it's not enough money to make any difference; is it?
Q For me, no. It's not.
THE PRESIDENT: It's too small to make any difference one way or the other, isn't it?
Q What I found definitely the banking industry is changed -- and I'd just like to say one thing that I think we can forget is, SBA isn't a handout. We're paying back our loans.
THE PRESIDENT: Absolutely.
Q And we're keeping people employed to pay taxes and that type of thing, where without the SBA a lot of jobs could be lost and that type of thing. So I don't, you know, I just hope it's not a handout type thing.
THE PRESIDENT: Yes. I think the taxpayers -- including the taxpayers in this room -- should know that at any given time nationwide we have under 10 percent of our loans in arrears and ultimate failures are under 1.5 percent. So our record at the SBA for making loans that default is about the same as any conservative bank in America. But we take a chance on people with a new idea that can't quite get there.
Pat, what were you going to say.
Q Mr. President, one of the things that we've done in this region is the change in percentages of our loans to women-owned business, which you see a good example of. Our numbers are about 25 percent right now. They were about eight percent prior to 1992. Many people are still starting businesses with credit cards and are still having that need for that smaller loan. I think our pre-qual program that is in some states, but not all, is doing an excellent job helping women-owned businesses. But that can make a difference and can get into the smaller loan market.
But our loss rates are very, very low for the number of loans we're doing.
Q And, Mr. President, I understand that the Boston office of the SBA was reduced from something like 50 people down to four people. So that's an example of increased productivity for the federal workers, and I think they ought to be congratulated for that.
THE PRESIDENT: You know, when I tell people that the federal work force is over 200,000 smaller than it used to be -- just folks, you know, when I go home and tell people that, they have a hard time believing it. But the reason is -- there are two reasons for that. One is, we had the money to give humane severance programs to the people who left the federal employment. That is, we gave them good early retirement packages or good early-out packages and time to work out a new education program or a new line of work.
The other reason is that the people that are left are doing a better job. I mean, there's a dramatic increase in productivity of these federal workers that are left. And I know it kind of contradicts a lot of people's preconception about the government, but I think it's interesting that you can cut the federal work force that much and literally nobody knows it happened because there's been no undermining of the quality of service that these federal employees have given. I think it's really -- and I thank you for saying that about it.
Q I think it's not only no undermining, it's getting better. It took me six months to get my first loan for my first building approved. It took me maybe six weeks to get the second one -- between 1993 and today.
Q I have a quick comment, too, about tax incentives for investing. The $17,500 mentioned, that usually covers only fixed assets. And I think that for a lot of small businesses, including myself, it would be really beneficial to have a tax incentive for something other than a fixed asset. Because a lot of times money is tied up on accounts receivable or inventory.
So, say you hired more people over the past year and you got some sort of, you know, break for payroll taxes because you employ that many more people -- so, it's a benefit to increase your business but you don't think the other side, all I can do is benefit from the fixed assets.
Q Mr. President --
THE PRESIDENT: Let me just say, that's an interesting point. Small businesspeople in America, particularly when they first start, is the only economic unit that's in the same position as most American families are -- most American families now pay more tax on the payroll then they do on the income tax. And the problem with the payroll tax is you have to pay it whether you make any money or not.
Now, since it supports the Social Security systems that, no matter what they tell you, is still solvent until the year 2019 -- we are going to have to make some changes in Social Security for when the people my age, the big baby boomer generation, retires because you'll have fewer people working and more people drawing. But we have to have some mechanism of keeping the system funded -- but it really -- I think that's a good point because the payroll tax is something -- since you have to pay it whether you make any money or not is an extraordinary burden on both a lot of middle class families and small businesses.
Q Mr. President, we want to thank you for coming here and sitting with this forum today. Tony has probably got another shift coming in the door here in a little bit but we want to thank you for listening to the issues and it's been a great opportunity.
THE PRESIDENT: Let me say too, I thank all of you for your support of the SBA. I thank you, Pat, and Administrator Phil Lader and his predecessor Erskine Bowles -- I put two people in charge of the SBA, one of them, Erskine Bowles, spent 20 years starting small businesses. It occurred to me that for a change we ought to have somebody in there that had actually done that; and then Mr. Lader has spent most of his life running them.
And it makes a big difference if you have people that have actually lived with this and know what they're doing. I'm very proud of them and all the people that work at SBA. I thank you for your support. It looks to me like from your example that's money well spent.
Thank you. Thank you all. (Applause.)
END 2:33 P.M. EST