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SBA in the Hot Seat

By Joel Russell
Hispanic Business Magazine
April 1, 2006

Since 2001, the budget of the Small Business Administration (SBA) has decreased 38 percent – or 45 percent when adjusted for inflation. Opposing opinions regarding the reasons driving the shrinkage have become fuel for an increasingly hot political fire.

Big vs. Small Business Interests?

Critics point to fiscal mismanagement by the Bush Administration that forced budget reductions in this small agency, and a political agenda intent on promoting the interests of large corporations over small companies.

Congresswoman Nydia Velazquez of New York, ranking Democrat on the Small Business Committee, has called for the resignation of SBA Administrator Hector Barreto, based in part on a temporary closure of the agency's 7(a) loan program.

"The American Small Business League wholeheartedly agrees with the assessment of the SBA by the Democrats of the House Small Business Committee," says Lloyd Chapman, president of the California-based trade organization.

But Mr. Barreto says the agency continues to provide services by increasing its "efficiency." The SBA budget request for FY2007 totals $624 million for operating costs, and authority to make $28 billion in loans and venture capital investments. "This builds on our successes over the last four years, when we reached more small businesses, including more women and minority entrepreneurs," says Mr. Barreto.

The budget proposes fees from lenders and borrowers on SBA loans of more than $1 million, a program he says will "strike a balance between the needs of the SBA's customers and clients with the needs of all American taxpayers."
On the other hand, Senator Olympia Snowe, a Republican from Maine who chairs the Committee on Small Business and Entrepreneurship, maintains Mr. Barreto simply "has been tasked to do more with a lot less from the federal treasury. That is unreasonable and short-sighted." Ms. Snowe notes that the SBA budget represents only three hundredths of a percent of the federal budget, yet "the SBA and its programs have a tremendous return on investment." She judges that the "annual cuts, taken cumulatively, threaten to significantly reduce small businesses' ability to compete."

"While President Bush brags about government costs going down for the [SBA], he fails to tell the truth that slashing federal resources over the years raises costs for small business owners," adds Senator John Kerry of Massachusetts, ranking Democrat on the committee. "This budget cuts or eliminates key programs that meet the needs of small businesses."

Data on the Downsizing

A review of the latest available SBA budget request for FY2007 (issued February 2006), conducted by HispanTelligence®, the research arm of Hispanic Business, indicates that:
  • The total SBA work force is 27 percent smaller than in 2001 (see table).

  • Projected SBA budget authority is down 38 percent from FY2001, from almost $1 billion to $624 million (see table).
However, this is in nominal terms. If the FY2001 budget numbers are expressed in 2007 dollars to correct for inflation, the reduction in real terms is 45 percent.

In line with these projections, salary expenses will be down 26 percent from 2001, and expenses for the business loan program will be down 57 percent.

The controversy prompted the U.S. Hispanic Chamber of Commerce, where Mr. Barreto formerly served as vice-chair, to issue a statement that USHCC member chambers are "steadfast supporters of the U.S. Small Business Administration, whose employees are vital to the reconstruction effort. The recent politically motivated attacks leveraged against Administrator Barreto undermine the hard work of a dedicated public servant and adversely affect the mission and commitment of the SBA."

Impact At Ground Level

Jorge Corralejo, CEO of Macondo Leasing and a board member for the Los Angeles-based Latin Business Association (LBA) for 23 years, says it's the budget and staffing cuts that have put tremendous pressure on local SBA officers. As a result, "they take a lesser amount of money and cut it into smaller pieces," explaining why SBA in recent years has made more loans of smaller average dollar amounts.

"There's less money to generate income in our community," says Mr. Corralejo, who served on the LBA board when Mr. Barreto chaired it. "If you want to reinvigorate the economy, why would you cut resources to those [small businesses] that make it happen? The giants of Corporate America get major tax cuts, but for small and medium-sized businesses, where are the benefits?"

A study by the Greenlining Institute, a nonprofit that helps immigrants participate in the U.S. financial system, confirms a shrinkage in SBA programs. According to the January report, the number of banks making SBA-backed loans in 2004 was half the number that participated in the program in 2001.

"Given the growth in minority-owned firms, there should be a greater share of SBA loans going to [these] businesses," the report states. "However, given the cuts in its budget and its poor handling of the needs of those affected by the recent hurricanes, we are doubtful that [the SBA] can play a bigger leadership role in promoting minority businesses."

Critics of "Preferential" Policy

In rebuttal, another new study, from the American Enterprise Institute, found "no factual reason to base policies on the idea that small businesses are more deserving of government favor than big companies. Preferential policies will hurt, not help, economic growth." The report concludes that government programs, specifically those at the SBA, "distort [the market] process and will only hinder entrepreneurs and investors from serving the needs of consumers."

On that score, Mr. Corralejo says he sees large corporations driving the political agenda and reaping the rewards from the economy, while "there's no advocacy" among the SBA's leadership. As a result, "we can't look to the government for help, but the government plays a critical role in the small business economy."



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