year. He indicates that on the average, the air pollution permits that he is issuing are for projects that cost approximately $14,000. He gives a number of examples of even smaller air pollution projects that have had to be undertaken by small business. And as I indicated, those types of expenditures now simply do not qualify for tax-exempt bonding. Mr. SMITH. Thank you.

Mrs. Fenwick?

Mrs. FENWICK. I am delighted and very proud of the report that comes from a State, a small portion of which I represent. And to learn how the Pollution Act has worked out, the Air Pollution Control Act. I wonder is it still true that the proceeds of these bond issues may, because of Federal laws, Internal Revenue Service requirements, only go for pollution and cannot be used in any way to increase production? Is that still part of the Federal law that governs the issuance of these bonds?

Mr. POWELL. Well, if one wants to finance more than $5 million in capital expenditures, using an industrial revenue bond, then the bond issue would have to be a pollution control bond issue. And in order to qualify as a pollution control industrial development bond, you are correct, the proceeds must be used only for equipment and machinery and related expenditures that control pollution.

As you may know, the Internal Revenue Service, which administers these regulations, has become more and more vigilant, tougher and tougher, frankly, in defining what pollution control equipment is. The section of the IRS that now administers this whole pollution control field is dominated by engineers and not lawyers, so that one must discount any gains that the pollution control equipment would bring to the company. If, for example, a bag house would extract valuable metal that has a salvage value, one has to discount with some rather complicated mathematics the price of the bag house to the extent that it returns a small profit to the company.

If the pollution control equipment preserves or extends the useful life of other equipment in the plant, that extension of life has to be discounted in the price of the pollution control equipment and deducted from the amount to be financed.

Mrs. FENWICK. I am not surprised at the number of businesses, because I made a survey of small business when I was there myself, and I think over 1 million people in New Jersey, which only has some 7 million-plus people, are in very, very small businesses, Mom and Pop, including up to 20. But, how does this work, how would this work? You speak in your testimony of making a group of these small businesses. Well, now, if their revenue bonds, depending upon their acceptability, how would this work out? Would that fee still be--I mean, you spoke of the fee being relatively valuable economically as a benefit when the bond issue is big enough, and not valuable when it is small. But, could they all be brought under so that that fee would cover all, is that your feeling there?

Mr. POWELL. Yes, that is correct. Let me give you an example. If the Small Business Administration were able to guarantee obligations of our authority, which is going to be used for pollution control, we, working in cooperation with the State department of environmental protection, could aggregate 10 small business pollution control projects, each of which had a value of $50.000, with a total amount of borrowings at $500,000, and we then could go to the Small Business Admin

istration and ask, that pursuant to this legislation, that they examine each of the projects and commit themselves to indirectly guarantee our $500,000 bond issue, the proceeds of which would be divided into 10 parts and distributed among the 10 small businesses. We would be able, today, to sell a bond issue of that sort, which is fully guaranteed by the Federal Government, as the legislation would provide, at an interest rate of around 5 percent and perhaps even lower. The bond issue would be as good as general obligation bonds of the Federal Government.

Mrs. FENWICK. I feel no embarrassment toward asking the taxpayer to take up some of the load of this financing and the loss of revenue in the guarantee of the bonds, because the point of pollution is the general good. And we are asking, in other words, we are merely saying to the general public that you are going to benefit. Otherwise, we would not have these laws, these regulations and so it is natural that we should ask you to share.

Thank you, Mr. Chairman.

Mr. SMITH. Mr. Hungate?

Mr. HUNGATE. No questions. Thank you, Mr. Chairman. I have heard of New Jersey all of my life. I understand you have the biggest mosquitoes in the world.

Mr. POWELL. I thought Texas had that distinction.

Mr. HUNGATE. Thank you very much. That was a helpful statement. Thank you, Mr. Chairman.

Mr. SMITH. Thank you very much. Your statement was very much to the point and brief, and we appreciate it.

Mr. POWELL. Thank you, sir.

Mr. SMITH. The subcommittee will adjourn until Friday morning. [Whereupon, at 11:43 a.m., the hearing was adjourned, to reconvene at 10 a.m., Friday, July 18, 1975.]

SBA ASSISTANCE FOR AGRICULTURAL CONCERNS AND TO MEET POLLUTION STANDARDS

FRIDAY, JULY 18, 1975

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON SMALL BUSINESS ADMINISTRATION
AND SMALL BUSINESS INVESTMENT COMPANY LEGISLATION
OF THE COMMITTEE ON SMALL BUSINESS,

Washington, D.C.

The subcommittee met, pursuant to notice, at 10 a.m., in room 2359, Rayburn House Office Building, Hon. Neal Smith (chairman of the subcommittee) presiding.

Mr. SMITH. The subcommittee will come to order. The first witness this morning is Hon. Jesse Unruh, treasurer, State of California, concerning H.R. 78, and related proposals.

Mr. Unruh, we are very fortunate and pleased to have you with us this morning on this very important matter. Others from California. have given testimony to the importance of this matter to the State of California and told us some about how it works in California, but I am sure, from the standpoint of the treasurer of the State, that you can give us more information that will be of considerable help. You may proceed.

TESTIMONY OF HON. JESSE UNRUH, TREASURER, STATE OF

CALIFORNIA

Mr. UNRUH. Thank you, Mr. Chairman. I will be very brief. In addition to being treasurer of the State of California, I am also chairman of the California Pollution Financing Authority, which was created in 1972 as a five-man board created to administer that law. That board elects its chairman, and I was elected chairman at the first meeting of that authority in March of this year.

I would like to address myself to what almost amounts to a redress of grievances insofar as small business is concerned in the pollution control financing field.

After the authority was created, and even after it had withstood successfully the various court tests that most of these kind of actions have to, the legislature authorized $200 million in bonds. The authority, after it was authorized to proceed with the utilization of this amount, went back to the legislature but was refused further financing authority.

Now, what actually happened, I suppose, is something that should have been predictable and could have been foreseen. The large companies, who had a hand in creating this authority and the consequent

I

bond issue, were in a position to immediately take advantage of that particular situation. Bonding front-end costs, as you know, are considerable. As a consequence, small businesses were in many cases, think, unapprised of the existence of this legislation and were suspicious, and rightfully so, in many cases of government, and not aware of the advantages of this. Even when they were aware, they were not really able to take advantage of the situation, so they did not apply in any great numbers. We have had a few applications and we have granted a very few small bond issues for small companies. But, by and large, it was the larger companies, particularly the oil companies and the utilities, which managed to come in and obtain the bulk of this issue.

When I became chairman of this and when the authority changedfour of the five members are new with this new administration-we found that, either in one stage or another, some $197 million was committed or nearly committed out of the $200 million bond issue. Almost all of that, as I said, had been committed to very large companies, with many of whom could probably have very well afforded to clean up their own pollution problems. When we had our first meeting, we set aside the remaining $31 million for small businesses.

Secondly, we turned down a request for a continuation of $23 million by Mobil Oil Co. There is also pending before us some $43 million in a request, a single request, by Standard Oil Co. of California. So, by and large, we have about $69 million left in this fund, which, linked with H.R. 78, could be utilized for small companies.

The front-end costs on a bond issue, Mr. Chairman, unless the company is extremely creditworthy and unless it is a sizable company, are just so much that most of the small companies cannot proceed at this point.

We have granted a couple of small issues in very special cases, and particularly we have been able to comfort a couple of cooperatives, such as Sunkist Growers, which is made up of a number of small growers, and we have been able to help them in cleaning up the pollution of their packing plants. But, beyond that, it is almost impossible for a small company to utilize this money.

We feel that, by and large, it serves a good purpose and with the proper guidelines laid down insofar as the companies that should be helped, Mr. Chairman, it will be worthwhile to go back to the legislature and ask for more money. If we could get H.R. 78 coupled up with this, through the ingenuity of the authority and through the guarantees of the SBA and hopefully the ingenuity of the financial institutions of California, we feel we could be of significant benefit to small and medium size companies. Therefore, I think we are almost in a position of being here today asking you to help us redress what I consider to be some of the grievances of small businesses in California, because up to this point, the large companies have been the principal beneficiary. We have the money, or would get the money to help them, or the authorization to help them. Now, we are willing to do that, but we really need this linkup that H.R. 78 will give us.

I want to say something here today, which I hope will not prejudice the other legislation, because I support that very much too. The House of Representatives has passed, I think, in the general agricultural appropriation, a $250 million appropriation, which would allow small