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                                                       Calendar No. 535
107th Congress                                                   Report
                                 SENATE
 2d Session                                                     107-230

======================================================================



 
                 THE SMALL BUSINESS DROUGHT RELIEF ACT

                                _______
                                

                 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)).
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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 . . .''
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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).

----------------------------------------------------------------------------------------------------------------
                                                               By Fiscal Year, in Millions of Dollars--
                                                     -----------------------------------------------------------
                                                        2002      2003      2004      2005      2006      2007
----------------------------------------------------------------------------------------------------------------
                                        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
----------------------------------------------------------------------------------------------------------------
\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.