During the Bush years, the Small Business Administration was treated like an unwanted step-child. But despite conservative Washington think tanks advocating for the abolishment of the agency for a long time, the Bush administration could never muster the political support for such a radical move.
Instead it starved it of funding and staff.
Eight consecutive years of budget cuts and staffing reductions hit home hardest in the aftermath of Hurricane Katrina in 2005. The agency massively bungled relief efforts, mostly because it was unprepared and lacked the resources to respond to such a massive calamity.
But a Katrina-scale disaster wasn’t the only problem. The same lack of resources opened the agency to widespread fraud and mismanagement.
When the Obama administration took office there was really nowhere for the agency to go but up. Although there was some talk early on about folding the SBA into the Commerce Department, Obama wisely avoided that course. Instead he appointed a high-profile administrator in Karen Mills.
Mills has extensive experience as a venture capitalist, corporate executive, and her parents run one of the nation’s most successful family-owned businesses: Tootsie Roll Industries. She has been at the forefront of the administration’s effort to leverage the agency’s programs to help the nation dig out of its latest calamity – the deep recession.
The revival of the SBA couldn’t come at a more critical time. Mismanagement and fraud continue to be a problem and the agency’s disaster readiness continues to wane.
In its latest report issued in November, the Government Accountability Office found widespread contracting abuses in the SBA’s Service-Disabled Veteran-Owned Small Business program. Ineligible firms often obtain millions of dollars in contracts.
Before that, GAO found a similar pattern of fraud and abuse in the SBA’s Historically Underutilized Business Zone, or HUBZone Program. Again, businesses had routinely gamed the system for tens of millions of dollars, with little oversight, and ever fewer repercussions from the agency.
In yet another report, issued last September, GAO uncovered serious shortcomings in the SBA’s disaster response plan. Congress passed a law to address specific shortcomings in the wake of Katrina, but four years after the storm, the report found only half of the 26 requirements set forth in the law had been implemented.
Among its most serious shortcomings, the SBA had yet to develop and maintain a comprehensive disaster recovery plan, leaving the agency unprepared should a major disaster strike again. The lack of just such a plan led to widespread mismanagement in the wake of Katrina.
Since then, the SBA has made progress responding to GAO’s criticism of its disaster responsiveness, according to Mills, such as an updated Disaster Recovery Plan that implements a “surge” plan to meet the needs of disaster victims in the wake of catastrophic, Katrina-scale disasters.
Meanwhile, Obama has reopened the spigot on SBA funding. The FY 2010 omnibus appropriation bill earmarked $824 million for the agency. The last Bush administration budget, FY 2008, the agency received less than $570 million.
But some lawmakers, like Congresswoman Nydia Velazquez, chairwoman of the House Committee on Small Business, think the agency is still underfunded and questions how some of the money is being spent.
At a hearing on the president’s FY2011 budget earlier this month, she noted that 89 percent of SBA’s new resources will go to unauthorized programs and agency overhead. “This leaves a mere 2.6 percent increase for core programs, ” she said.
The budget also earmarks only $2 million for fraud controls that Velazquez says “won’t even put a dent in the $500 million in HUBZone and Veteran Disabled fraud that GAO has uncovered — let alone waste that hasn’t been identified. ”
She also criticized the president for leaving out funding for the New Markets Venture Capital program, which she said, makes money for the government. Instead, she said, the president is pouring money into emergency programs like the SBA Express, which cuts down on paperwork and speeds up SBA-backed loans to businesses. Velazquez asserts the program also could cost tax payers as much as $128 million in FY 2011.
Some of the agency’s bright spots, however, have been getting loans to small businesses caught in the credit crunch. A major initiative for the agency, since passage of the Recovery Act last year, the SBA has leveraged $500 million in taxpayer dollars into more than $20 billion for small businesses.
More than 1,100 lenders, who hadn’t participated in SBA lending since at least 2007, rejoined the program, according to Mills, who estimates the agency’s weekly volume increase at more than 90 percent.
The SBA has also been charged with getting capital into the hands of community banks through the president’s proposed $30 billion Small Business Lending Fund. It funnels low-cost capital to community banks coupled with incentives to increase their small business loans beyond 2009 levels.
The SBA’s lending programs are too small to have a major effect on the credit crisis. Only about 1 percent of small businesses participate in its programs. But Mills says it can be effective filling the gaps in small business financing, which is its principal goal.
To that end, critics argue that the SBA needs to create a direct lending program. “Very solid strategies have been established that would enable the SBA to loan directly to small businesses allowing for the sale back of loans to private sector investors and lenders after a period of time,” said Margot Dorfman, chief executive officer for the U.S. Women’s Chamber of Commerce.
Critics also say the SBA needs to be doing more for minority and women-owned firms. Between FY2008 and FY 2009, the percentage of SBA-backed loans going to women-owned firms dropped from 23 percent to 20 percent and total dollars lent fell to from 18 percent to 6 percent, according to Dorfman.
During the same period, the percentage of SBA backed loans going to minority-owned firms dropped from 33 percent to 22 percent and the total dollars lent dropped from 32 percent to 4 percent, she added. To its credit, the SBA recently released a proposed rule that would finally help increase the percentage of federal contracts to women-owned firms. Congress originally passed the measure in 2000, but the Bush administration simply ignored it.
Fortunately, the days of Bush administration neglect are over. The SBA is back from the brink, and the administration appears committed to supporting the agency’s programs. But its turnaround is just beginning.