[Senate Report 107-230]
[From the U.S. Government Publishing Office]
Calendar No. 535
107th Congress Report
SENATE
2d Session 107-230
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THE SMALL BUSINESS DROUGHT RELIEF ACT
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July 31, 2002.--Ordered to be printed
_______
Mr. Kerry, from the Committee on Small Business and Entrepreneurship,
submitted the following
R E P O R T
[To accompany S. 2734]
[Including cost estimate of the Congressional Budget Office]
The Committee on Small Business and Entrepreneurship, to
which was referred the bill (S. 2734) to provide emergency
assistance to non-farm small business concerns that have
suffered economic harm from the devastating effects of drought,
having considered the same, reports favorably thereon with an
amendment and recommends that the bill as amended do pass.
On July 24, 2002, the Committee on Small Business and
Entrepreneurship considered the bill, S. 2734, to provide
emergency assistance for non-farm small business concerns that
have suffered economic harm from the devastating effects of
drought. The Committee adopted by unanimous voice votes a
substitute amendment offered by the Chairman of the Committee,
Senator John Kerry, and the Ranking Republican, Senator
Christopher Bond; an amendment offered by Senator Carl Levin to
include low water levels on the Great Lakes as a disaster term;
and an amendment offered by Senators John Edwards and George
Allen to require the Administrator of SBA to respond to
disaster declaration requests from governors within 30 days. As
amended, S. 2734 would clarify that non farm-related small
businesses that have suffered economic injury from drought are
eligible to receive financial assistance through the Small
Business Administration Economic Injury Disaster Loan program.
Having considered S. 2734, the Committee reports favorably
thereon and recommends that the bill, as amended, do pass.
I. NEED FOR BILL
In favorably reporting S. 2734, the Small Business Drought
Relief Act, the Committee seeks equal treatment of small
business drought victims by the Small Business Administration
(SBA or the Agency). According to the SBA's interpretation of
the current disaster relief statute, only farm-related \1\
small businesses hurt by drought are eligible for SBA economic
injury disaster loans. The Agency is denying non farm-related
small businesses \2\ hurt by drought access to economic injury
disaster loans based on the view that drought is not a disaster
because by statutory definition a disaster must be a ``sudden
event.'' The Committee believes the SBA has failed to take into
account the full scope of Congress' intent when it approved the
disaster relief law in the Small Business Act (see paragraph
7(b)(2) and subparagraphs (A), (B), (C) and (D)).
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\1\ According to SBA's Office of Disaster Assistance, the term
farm-related means more than small businesses related to agriculture,
such as feed and seed stores. As described in an example in this
section regarding a dress shop, SBA interprets ``farm-related'' to
include small businesses whose revenues are tied to farm-related
businesses hurt by the relevant disaster.
\2\ Droughts hurt more than agricultural, forestry and livestock
businesses. Some examples of small businesses that are reliant upon
water sources, such as streams and rivers and lakes, but are not farm-
related, would be fish and tackle shops, rafting businesses,
restaurants, motels, camp grounds, marinas and gas stations.
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The Committee has interpreted paragraph 7(b)(2) of the
Small Business Act to mean that any small business concern is
eligible for SBA economic injury disaster loans (EIDLs) after a
disaster, including a drought, has been proclaimed. The SBA has
interpreted its authority under the Federal statute to apply
only to farm-related small businesses when there is a drought
disaster declaration. The Committee is concerned that the SBA's
interpretation of its authority narrows the scope of disaster
relief assistance that the Congress intended in passing the
law. Consequently, the Committee staff sought from the SBA
Office of General Counsel (OGC) its legal opinion and any
legislative history that would support the SBA's interpretation
of the law; the OGC has refused to provide the Committee with a
copy of the legal opinion to support its position. Further
demonstrating the need for this legislation, the SBA OGC has
informed the Committee staff that it has no evidence that
Congress intended for the SBA to limit EIDLs to farm-related
small business concerns when there is a drought disaster
declaration by the U.S. Secretary of Agriculture.
Contrary to the position that drought is not a disaster
because it is not a sudden event, as of July 16, 2002, the SBA
had in effect drought declarations in 36 states, limiting
disaster loan eligibility to farm-related small businesses. The
36 states include: Arizona, California, Colorado, Delaware
(severe weather due to very low precipitation), Georgia, Idaho,
Indiana, Iowa, Kansas, Kentucky, Maine, Maryland (severe
weather due to very low precipitation), Massachusetts,
Michigan, Montana, Nebraska, Nevada, New Mexico, New York,
North Carolina, North Dakota, Ohio, Oklahoma, Oregon,
Pennsylvania, South Carolina, South Dakota, Tennessee, Texas,
Utah, Vermont, Virginia, Washington, West Virginia (severe
weather due to very low precipitation), Wisconsin, and Wyoming.
As illustrated by the following example, the SBA's current
policy is unfair and contradictory: If a small business owner
of a dress shop in a town that has been declared a disaster
because of drought is unable to pay the bills because farmers
hurt by drought are no longer spending money in the store, the
small business concern is eligible for an SBA economic injury
disaster loan. However, if a neighboring small business boat
rental company in that same town is unable to meet its
obligations because the drought has dried up the lake and it
has lost its customers, it is not eligible for an SBA disaster
loan UNLESS the owner can prove that he or she lost business
because farmers hurt by the drought are no longer renting the
boats.
The Committee concludes, based on the aforementioned
declarations and the statute,\3\ that the SBA has the authority
to make economic injury disaster loans to ``any small business
concern'' in a declared disaster area, not just farm-related
small businesses. In order to correct the interpretation by the
SBA of this disaster relief statute to ensure that both farm-
related and non farm-related small businesses are eligible for
economic injury disaster loans, the bill amends the Small
Business Act to restate its authority, to specifically include
drought in the definition of ``disaster,'' and to express the
intent of this Committee, which has oversight of the SBA, that
the Agency is to treat all small businesses in declared
disaster areas equally. It is simply not fair if two small
businesses next door to each other are suffering economic
injury because of drought that one would be eligible for SBA
disaster assistance and the other would not.
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\3\ Section 7(b) Except as to agricultural enterprises as defined
in section 18(b)(1) of this Act, the Administration also is empowered
to . . . Section 7(b)(2) make such loans . . . as the Administration
may determine to be necessary or appropriate to any small business
concern or small agricultural cooperative located in an area affected
by a disaster, if the Administration determines that the concern or the
cooperative has suffered a substantial economic injury as a result of
such disaster . . .''
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This bill also seeks to aid small businesses suffering
economic injury because of low levels on the Great Lakes by
making them eligible for SBA economic injury disaster loans and
requires the SBA Administrator to respond in writing to
disaster declarations from governors within 30 days.
II. DESCRIPTION OF THE BILL
In order to help small non farm-related businesses hurt by
drought, eliminate contradictory interpretations, and clarify
existing law and Congressional intent, the bill makes several
changes to the Small Business Act. To address the SBA's
contradictory argument that a drought is not a disaster by
definition, the bill adds the word drought to the definition of
disaster in the Small Business Act. In order to address
concerns that adding drought would expand SBA's disaster
program too broadly, the Kerry-Bond substitute amendment
specifies that assistance for drought victims is only available
to small businesses, not home owners, and that they are only
eligible for SBA economic injury disaster loans, not physical
disaster loans.
While the Committee believes that SBA already has the
authority to make economic injury disaster loans to ``any small
business concern'' in a declared disaster area and should treat
all such businesses equally, in order to clarify that authority
as it applies to drought victims, the Kerry-Bond substitute
amendment, that was unanimously approved by the Committee,
directs the Administration to make economic injury disaster
loans available to both farm-related and non farm-related small
businesses hurt by drought.
The Kerry-Bond substitute amendment also includes a
provision to ensure that small business drought victims meet
requirements demonstrating substantial economic injury caused
by drought.
Last, the Kerry-Bond substitute preserves a state
governor's role in initiating a drought declaration rather than
limiting it to action by the U.S. Secretary of Agriculture.
Low Water Levels on the Great Lakes
The Committee unanimously approved an amendment offered by
Senator Levin to make small businesses, such as marinas or
charter fishing operations, hurt by disastrously low water
levels on the Great Lakes eligible for SBA economic injury
disaster assistance loans. The amendment adds ``below average
water levels in the Great Lakes'' to the definition of
disaster, which currently includes but is not limited to
floods, hurricanes, earthquakes, ocean conditions resulting in
the closure of customary fishing waters, riots, and civil
disorders.
During the markup of the bill, the Committee's ranking
member raised concerns about the impact of the amendment on the
disaster loan program and the cost. He proposed accepting the
amendment and committed to work with the Chairman and Senator
Levin to resolve any issues before the bill's consideration by
the full Senate. In resolving the cost issues, CBO does not
expect the demand for loans because of low water levels in the
Great Lakes to be very large, and estimates a cost of
approximately $1 million annually.
Great Lakes small businesses that are suffering economic
injury because of severely low water levels have been excluded
by a technicality from the effort to help small businesses
harmed by drought, including very low precipitation. This is
because Michigan and other Great Lakes states are not
officially ``in drought.'' Yet the Great Lakes have experienced
alarmingly low water levels over the past few years, harming
the small businesses that depend on the lakes for their
livelihood. For example, under normal conditions, small marinas
generally need to dredge every 5-25 years; however, during
periods of low water, they must dredge almost on an annual
basis, which causes significant economic injury because they
are faced with unforeseeable and large expenses. As a result,
these small businesses do not have the resources to meet the
added costs of operating when the lake water levels are low.
A Michigan State University report concluded that the
estimated impact of below average water levels on Michigan's
marinas alone was $11.1 million in a single year.\4\ Great
Lakes marinas are finding it hard to pay their bills because
they have lost revenue due to the costs associated with below-
average low water levels; for example, customers (boats) are
unable to access fuel docks and other facilities, such as boat
maintenance facilities. An SBA low-interest economic injury
disaster loan would help these small businesses meet their
operating costs, which includes dredging expenses. Dredging is
necessary to marinas because it restores customer access to
their facilities, thereby allowing the marinas to generate
earnings, which in turn allows repayment of the loans. Disaster
assistance loans would allow the marina operator to spread the
cost of dredging over the expected life of the loan.
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\4\ ``The Impacts of Low Water on Michigan Great Lakes Marinas,''
by Edward Mahoney, Chang Tzu-Ching, Charles Pistis, and Lori Martin
(Michigan State University, April 2000).
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While low water levels do not qualify as a natural disaster
under current definitions and are not considered a ``drought,''
it is an unpredictable natural occurrence that is beyond the
control of the small business owner and that causes significant
economic hardship. Lower than average water levels are similar
to other ocean conditions that already qualify for disaster
assistance loans in the existing SBA program, such as ``recent
El Nino-related ocean conditions'' and ``commercial fishery
failures, fishery resource disasters, [or] ocean conditions
resulting in the closure of customary fishing waters.''
Clearly, lower than average water levels on the Great Lakes
would fit the intent of these other existing qualifying
categories.
Low water levels on the Great Lakes differ from low water
levels on a river because the Great Lakes take much longer to
rebound from these conditions due to the interconnected system
of lakes and rivers. Water levels in a large river system
usually fluctuate as a function of localized storm activity or
short-term climate changes and are often controlled by locks
and dams built to minimize flooding. However, fluctuations in
Great Lakes water levels are a function of the hydrological
cycle. The Great Lakes, like river systems, are subject to
seasonal fluctuation, but are more affected by longer-term
climate changes. Once extremely high or low water levels occur
in the Great Lakes system, it can take the system up to 3-5
years to recover from these situations. For example, although
the Great Lakes have experienced above average precipitation
over the past twelve months, the water levels of lakes
Superior, Michigan, Huron, and St. Clair are still well below
average and could remain so for the next six months. It is this
lengthy recovery time that can have a significant adverse
effect on commerce in the Great Lakes.
Economically, the Great Lakes are of national and
international importance. They are the largest freshwater body
in the world, containing one-fifth of the world's freshwater.
More than 40 million people live in and around the Great Lakes
and depend upon this resource for drinking water, recreation,
electrical and hydro power, and commerce. For example, sport
fishing is a $4 billion industry in the Great Lakes Basin.
Presently, the Great Lakes water levels are at their lowest
episode in 35 years, and small business, as well as the general
public, has been significantly impacted. This resource is very
important to the economy of the Great Lakes region and the
Nation.
A disaster declaration for small businesses suffering
economic injury as a result of below average water levels in
the Great Lakes would follow the same process used for other
SBA economic injury disaster declarations. A Governor must ask
the Small Business Administration to make a declaration based
on the governor's certification that at least 5 small
businesses in a disaster area have suffered substantial
economic injury as a result of the disaster and are in need of
financial assistance not otherwise available on reasonable
terms.
The Committee finds that providing emergency assistance to
small business concerns that have suffered substantial economic
harm due to below average water levels in the Great Lakes will
help these businesses remain viable and productive contributors
to the Great Lakes regional economy, providing jobs and
contributing to the tax base.
Timely Response Requirement to Governors
The Committee unanimously approved an amendment offered by
Senator Edwards for himself and Senator Allen to require the
Administrator of SBA to respond in writing to disaster
declaration requests from governors within 30 days. While the
SBA has a good response record, the amendment is aimed at
preventing SBA from slipping into the USDA's record of 7- and
8-month delays.
III. COMMITTEE VOTE
In compliance with rule XXVI(7)(b) of the Standing Rules of
the Senate, the following votes were recorded on July 24, 2002.
A motion by Chairman Kerry to adopt a substitute amendment
offered for himself and Senator Bond clarifying that non farm-
related small business drought victims are eligible for SBA
economic injury disaster loans passed by unanimous voice vote.
A motion by Chairman Kerry to adopt an amendment by Senator
Levin to allow small businesses suffering economic injury
because of low water levels of the Great Lakes to apply for SBA
economic injury disaster loans passed by unanimous voice vote.
A motion by Senator Kerry to adopt an amendment by Senators
Edwards and Allen to require the Administrator of SBA to
respond to disaster declaration requests from governors within
30 days passed by unanimous voice vote. A motion by Senator
Kerry to adopt the ``Small Business Drought Relief Act'' as
amended, was approved by a 19-0 recorded vote, with the
following Senators voting in the affirmative: Kerry, Bond,
Levin, Harkin, Lieberman,Wellstone, Cleland, Landrieu, Edwards,
Cantwell, Carnahan, Burns, Bennett, Snowe, Enzi, Fitzgerald,
Crapo, Allen, and Ensign.
IV. EVALUATION OF REGULATORY IMPACT
In compliance with rule XXVI(11)(b) of the Standing Rules
of the Senate, it is the opinion of the Committee that no
significant additional regulatory impact will be incurred in
carrying out the provisions of this legislation. There will be
no additional impact on the personal privacy of companies or
individuals who utilize the services provided.
V. CHANGES IN EXISTING LAW
In the opinion of the Committee, it is necessary to
dispense with the requirement of rule XXVI(12) of the Standing
Rules of the Senate in order to expedite the business of the
Senate.
VI. COST ESTIMATE
In compliance with rule XXVI(11)(a)(1) of the Standing
Rules of the Senate, the Committee estimates that the cost of
the legislation will be equal to the amounts indicated by the
Congressional Budget Office in the following letter.
U.S. Congress,
Congressional Budget Office,
Washington, DC, July 31, 2002.
Hon. John F. Kerry,
Chairman, Committee on Small Business and Entrepreneurship,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for S. 2734, the Small
Business Drought Relief Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Julie
Middleton.
Sincerely,
Barry B. Anderson
(For Dan L. Crippen, Director).
Enclosure.
CONGRESSIONAL BUDGET OFFICE COST ESTIMATE
S. 2734--Small Business Drought Relief Act
Summary: S. 2734 would make Small Business Administration
(SBA) loans available to non-agricultural small businesses that
have suffered economic injury because of drought conditions
through SBA's disaster loan program. Under the bill, such
conditions would include low water levels in the Great Lakes
region. The loans would be directed at small businesses that
sell, distribute, market, or otherwise engage in commerce
related to water and water resources, such as lakes, rivers,
and streams.
Assuming appropriation of the necessary funds, CBO
estimates that implementing S. 2734 would cost about $25
million over the 2003-2007 period. S. 2734 would not affect
direct spending or receipts; therefore, pay-as-you-go
procedures would not apply. S. 2734 contains no
intergovernmental or private-sector mandates as defined in the
Unfunded Mandates Reform Act (UMRA) and would impose no costs
on state, local, or tribal governments.
Estimated cost to the Federal Government: The estimated
budgetary impact of S. 2734 is shown in the following table.
The costs of this legislation fall within budget function 450
(community and regional development).
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By Fiscal Year, in Millions of Dollars--
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2002 2003 2004 2005 2006 2007
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SPENDING SUBJECT TO APPROPRIATION
Spending Under Current Law for SBA's Disaster Loan
Program:
Estimated Authorization Level \1\............... 285 291 299 306 314 323
Estimated Outlays............................... 338 314 307 304 312 321
Proposed Changes:
Estimated Authorization Level................... 0 5 5 5 5 5
Estimated Outlays............................... 0 4 5 5 5 5
Spending under S. 2734 for SBA's Disaster Loan
Program:
Estimated Authorization Level................... 285 296 304 311 319 328
Estimated Outlays............................... 338 318 312 309 317 326
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\1\ The 2002 level is the amount appropriated for that year for SBA's Disaster Loan Program. Amounts shown for
the 2002-2007 period are CBO's baseline estimates that reflect the 2002 appropriation adjusted for anticipated
inflation.
Basis of Estimate: For this estimate, CBO assumes that S.
2734 will be enacted by the start of fiscal year 2003 and that
the necessary funds will be appropriated for each year.
Most SBA loans under the disaster loan program are to
repair physical damage caused by natural disasters. About 20
percent of the agency's loans go to small businesses to help
them recover from economic injury caused by disasters. In
recent years SBA has provided an average of about $160 million
a year in economic injury loans to small businesses.
SBA provides economic injury loans to farm-related
businesses that are located in areas adversely affected by
drought as designated by the Secretary of Agriculture. S. 2734
would authorize SBA to provide loans to nonfarm businesses
affected by drought as well. State governors would have the
authority to petition the SBA to declare certain counties or
their entire state a disaster area because of drought. If SBA
approves a state's petition, the agency could provide small
businesses with economic injury loans in designated areas. In
addition, S. 2734 would authorizes SBA to provide loans to
small businesses that have been adversely affected by low water
levels in the Great Lakes.
CBO expects that recreation and water sports businesses,
marinas, and other tourism businesses are the small businesses
most likely to apply for loans under this expanded program. CBO
estimates that demand for this expanded loan program would
increase by 15 percent to 20 percent. An increase of this
magnitude would result in $25 million to $30 million more
economic injury loans being made each year. Under the Federal
Credit Reform Act, the budgetary cost of loans is the net
present value of cash flows including loan disbursement and
repayments, net of defaults and recoveries. The average
resulting subsidy cost of SBA disaster assistance loans is 17
percent. Thus, CBO estimates that the increase in loans under
S. 2734 would cost about $5 million a year.
SBA projects that demand for economic injury loans under
this bill may increase by as much as 30 percent, but CBO
expects that demand for these loans will not meet SBA's
expectations--which would be equivalent to the increase
experienced by SBA following the September 2001 terrorist
attacks. The increase in demand for such loans, however, would
depend on the number and duration of drought declarations that
may occur. It would also be a challenge for the SBA to develop
a definition of drought that is applicable across the country
because of varying geographic weather patterns and normal
climatic fluctuations. In addition, small businesses must prove
that they have suffered substantial economic injury to be
eligible for a loan. Because of the chronic nature of drought
versus the sudden impact of other disasters, businesses may
have trouble proving their eligibility for a loan.
CBO expects the demand for loans because of low water
levels in the Great Lakes would not be very large either
because the demand for a similar state program and other SBA
programs has been small. In Michigan, for example, the state
provided loans to marinas who were suffering economic harm
because of low water levels. In the two-year period since 2000,
15 loans have been dispersed with an average loan amount of
about $40,000. In addition, the SBA has made loans available to
Great Lakes businesses through its 7(a) general business loan
program and demand for those loans has been low. Though the
terms of economic injury loans are more favorable than the
terms of the above-mentioned loans, CBO expects that increased
demand for such loans would be small.
Pay-as-you-go considerations: None.
Intergovernmental and private-sector impact: S. 2734
contains no intergovernmental or private-sector mandates as
defined in UMRA and would impose no costs on state, local, or
tribal governments.
Estimate prepared by: Federal costs: Julie Middleton;
impact on state, local, and tribal governments: Leo Lex; impact
on the private sector: Cecil McPherson.
Estimate approved by: Peter H. Fontaine, Deputy Assistant
Director for Budget Analysis.
VII. SECTION-BY-SECTION ANALYSIS
The bill amends the Small Business Act to clarify that non
farm-related small businesses that have suffered economic
injury caused by drought are eligible to receive financial
assistance through the Small Business Administration Economic
Injury Disaster Loan program; currently the Small Business
Administration makes available economic injury disaster loans
only to farm-related drought victims. It also authorizes the
Small Business Administration to make economic injury disaster
loans to small businesses adversely affected by low water
levels on the Great Lakes and requires the Administrator of SBA
to respond in writing to disaster declaration requests from
governors within 30 days.
Section 1. Loans to Small Business Concerns Damaged by Drought
Subsection (a) establishes the short title of the bill as
the ``Small Business Drought Relief Act.''
Subsection (b) sets forth the findings.
Subsection (c)(1) amends the definition of disaster in
Section 3(k) of the Small Business Act (15 U.S.C. 632(k)) to
include drought and low water levels on the Great Lakes, while
specifying that drought victims can only apply for SBA economic
injury disaster loans and not physical disaster home loans or
physical disaster business loans.
Subsection (c)(2)(A) amends Section 7(b)(2) of the Small
Business Act (15 U.S.C. 636(b)(2)) to clarify that SBA has the
authority to make economic injury disaster loans not only to
farm-related small businesses hurt by drought but also to non
farm-related small businesses hurt by drought.
Subsection (c)(2)(B) amends Section 7(b)(2)(B) of the Small
Business Act (15 U.S.C. 636(b)(2)) to correct the cite
reference to the law governing the authority of the Secretary
of Agriculture to declare a disaster. It also includes language
to ensure that small business drought victims meet requirements
demonstrating substantial economic injury caused by drought.
Subsection (d) amends Section 7(b)(2)(D) of the Small
Business Act (15 U.S.C. 636(b)(2)(D)) to require the SBA
Administrator to respond in writing to disaster declarations
from governors within 30 days.
Subsection (e) directs the SBA to issue final rules to
implement this Act within 45 days of enactment.