SBA Ill-Equipped to Handle Obama Stimulus Funds
The Obama stimulus bill throws money at the Small Business Administration, but without a massive overhaul the agency is likely to fumble the ball.
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PrintAs the smoke clears on President Obama’s economic stimulus plan, the Small Business Administration is emerging as one of the winners. That’s both good and potentially disastrous.
It’s good because the SBA already has programs in place that can get aid to small firms quickly. It’s potentially disastrous because the president obviously has no idea how badly the agency was gutted during the Bush years.
As Hurricane Katrina and the other Gulf storms proved, the SBA’s ability to respond to a major crisis is woeful at best, even taking into account the unprecedented size of the disaster. In the months afterward, the agency continued to perform shamefully.
Now, as a result of the Obama stimulus bill, the SBA is about to be handed up to $20 billion in new lending authority for its flagship 7(a) loan program and its 504 Loan program for hard assets like real estate. The bill will also provide funds for the SBA’s microloan program. (In a side note, the Bush administration has been trying to kill the program for years.)
The seeds of disaster are being sown because the SBA is ill-equipped to handle the sudden influx of new spending authority. It’s sort of like the Bush administration’s ill-fated plunge into Iraq. A lot of money and resources went into the invasion, but very little thought or resources were devoted to managing Iraq after the invasion. The result was chaos.
It’s one thing to throw money at the agency. The real question is, can the SBA administer it effectively? Evidence suggests it can’t in its current state. During the Bush years, the agency was more than decimated. About one-third of its staff was cut, and its budget was slashed by half. "It was terribly, and unjustifiably in my view, cut under the previous administration," said Sen. Mary Landrieu, D-La., the new chairman of the Senate small business committee.
One net result of Bush mismanagement, of course, was the Katrina catastrophe. But the agency has been wracked by other embarrassments as well, including massive frauds in some of its lending programs caused by a lack of oversight, inadequate funding, or general agency ineptness.
The agency has yet to get a handle on its management of the government’s small business contracting programs. Large Fortune 500 companies continue to receive billions of dollars a year in federal contracts earmarked for small firms, despite repeated investigations by the SBA’s Office of Inspector General, pointing out shortcomings.
Meanwhile, as the nation spun into the recession and credit grew increasingly tighter, the SBA basically sat on the sidelines. The number of loans, as well as the size of the loans, approved under the 7(a) program declined. In the 504 program, loan approvals fell by 17 percent and loan dollars declined by 16 percent.
In the first quarter of 2009, the SBA’s 7(a) program dropped 57 percent from the first quarter of fiscal year 2008. The total dollar value of loans processed by the SBA was down 40 percent from last year.
If past recessions are any indication, tens of thousands of workers laid off in the current downturn won’t have jobs to go back to as the economy recovers. Instead, many will try to start their own businesses. This is one of the few benefits of a downturn. Recovering economies typically spawn thousands of nimble, innovative new businesses, many of which will have the potential for success.
Over the years, the SBA has been one of the principal sources of business advice and training. But a recent congressional hearing revealed that the SBA’s entrepreneurial development programs are in disarray as well.
"The SBA entrepreneurial development programs have grown into a fragmented array of programs," said Margot Dorfman, chief executive of the U.S. Women’s Chamber of Commerce, in testimony before the House Small Business Committee. "These fragmented programs have resulted in a disorganized, overlapping, and inefficient delivery of service in a system that is ill-prepared to effectively address the challenges of our current economy."
Even during one of the longest and strongest periods of economic growth in the nation’s history, the average revenues of women and minority firms declined, and the percentage of small business owners designated as "high-income earners" contracted, she noted.
While the SBA can take some credit for the fact that women-owned firms grew 42.3 percent between 1997 and 2006, their combined annual sales only grew only 4.4 percent. That means their average annual sales dropped 36 percent. Minority business owners have fared even worse.
Over the last decade, the number of minority-owned firms increased by 35 percent, but their gross receipts increased just 13 percent. Consequently, between 1997 and 2002, the average gross receipts of minority-owned firms decreased by 16 percent, according to Dorfman.
In 1989, small-business-owning households were nearly two times more likely (62.1 percent versus 33 percent) to be classified as high-income compared with households that did not own a business. In 2004, only 55.2 percent of small business owners were likely to be considered high-income, versus 24.8 percent of those employed by a firm, according to a study by the SBA’s Office of Advocacy.
The Obama administration needs to send a clear signal that small businesses will be a priority in his administration. The president can do that by restoring the SBA to cabinet-level status, which it last had under the Clinton administration. The fact that he hasn’t so far, despite the call of legislative leaders, is disappointing.
The president must also commit to a top-to-bottom overhaul of the SBA. Anything less and the government will end up throwing a lot of money at the problem with slim chances of success, not only in meeting the needs of entrepreneurs but in spurring the economic recovery.
It’s good because the SBA already has programs in place that can get aid to small firms quickly. It’s potentially disastrous because the president obviously has no idea how badly the agency was gutted during the Bush years.
As Hurricane Katrina and the other Gulf storms proved, the SBA’s ability to respond to a major crisis is woeful at best, even taking into account the unprecedented size of the disaster. In the months afterward, the agency continued to perform shamefully.
Now, as a result of the Obama stimulus bill, the SBA is about to be handed up to $20 billion in new lending authority for its flagship 7(a) loan program and its 504 Loan program for hard assets like real estate. The bill will also provide funds for the SBA’s microloan program. (In a side note, the Bush administration has been trying to kill the program for years.)
The seeds of disaster are being sown because the SBA is ill-equipped to handle the sudden influx of new spending authority. It’s sort of like the Bush administration’s ill-fated plunge into Iraq. A lot of money and resources went into the invasion, but very little thought or resources were devoted to managing Iraq after the invasion. The result was chaos.
It’s one thing to throw money at the agency. The real question is, can the SBA administer it effectively? Evidence suggests it can’t in its current state. During the Bush years, the agency was more than decimated. About one-third of its staff was cut, and its budget was slashed by half. "It was terribly, and unjustifiably in my view, cut under the previous administration," said Sen. Mary Landrieu, D-La., the new chairman of the Senate small business committee.
One net result of Bush mismanagement, of course, was the Katrina catastrophe. But the agency has been wracked by other embarrassments as well, including massive frauds in some of its lending programs caused by a lack of oversight, inadequate funding, or general agency ineptness.
The agency has yet to get a handle on its management of the government’s small business contracting programs. Large Fortune 500 companies continue to receive billions of dollars a year in federal contracts earmarked for small firms, despite repeated investigations by the SBA’s Office of Inspector General, pointing out shortcomings.
Meanwhile, as the nation spun into the recession and credit grew increasingly tighter, the SBA basically sat on the sidelines. The number of loans, as well as the size of the loans, approved under the 7(a) program declined. In the 504 program, loan approvals fell by 17 percent and loan dollars declined by 16 percent.
In the first quarter of 2009, the SBA’s 7(a) program dropped 57 percent from the first quarter of fiscal year 2008. The total dollar value of loans processed by the SBA was down 40 percent from last year.
If past recessions are any indication, tens of thousands of workers laid off in the current downturn won’t have jobs to go back to as the economy recovers. Instead, many will try to start their own businesses. This is one of the few benefits of a downturn. Recovering economies typically spawn thousands of nimble, innovative new businesses, many of which will have the potential for success.
Over the years, the SBA has been one of the principal sources of business advice and training. But a recent congressional hearing revealed that the SBA’s entrepreneurial development programs are in disarray as well.
"The SBA entrepreneurial development programs have grown into a fragmented array of programs," said Margot Dorfman, chief executive of the U.S. Women’s Chamber of Commerce, in testimony before the House Small Business Committee. "These fragmented programs have resulted in a disorganized, overlapping, and inefficient delivery of service in a system that is ill-prepared to effectively address the challenges of our current economy."
Even during one of the longest and strongest periods of economic growth in the nation’s history, the average revenues of women and minority firms declined, and the percentage of small business owners designated as "high-income earners" contracted, she noted.
While the SBA can take some credit for the fact that women-owned firms grew 42.3 percent between 1997 and 2006, their combined annual sales only grew only 4.4 percent. That means their average annual sales dropped 36 percent. Minority business owners have fared even worse.
Over the last decade, the number of minority-owned firms increased by 35 percent, but their gross receipts increased just 13 percent. Consequently, between 1997 and 2002, the average gross receipts of minority-owned firms decreased by 16 percent, according to Dorfman.
In 1989, small-business-owning households were nearly two times more likely (62.1 percent versus 33 percent) to be classified as high-income compared with households that did not own a business. In 2004, only 55.2 percent of small business owners were likely to be considered high-income, versus 24.8 percent of those employed by a firm, according to a study by the SBA’s Office of Advocacy.
The Obama administration needs to send a clear signal that small businesses will be a priority in his administration. The president can do that by restoring the SBA to cabinet-level status, which it last had under the Clinton administration. The fact that he hasn’t so far, despite the call of legislative leaders, is disappointing.
The president must also commit to a top-to-bottom overhaul of the SBA. Anything less and the government will end up throwing a lot of money at the problem with slim chances of success, not only in meeting the needs of entrepreneurs but in spurring the economic recovery.
