```

[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]

 MEETING TO CONSIDER THE COMMITTEE'S VIEWS AND ESTIMATES ON THE SMALL 
            BUSINESS ADMINISTRATION FISCAL YEAR 2014 BUDGET

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD

                           FEBRUARY 27, 2013

                               __________

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

            Small Business Committee Document Number 113-003
              Available via the GPO Website: www.fdsys.gov

                                _____

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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                       BLAINE LUETKEMER, Missouri
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                   JAIME HERRERA BEUTLER, Washington
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                       DAVID SCHWEIKERT, Arizona
                       KERRY BENTIVOLIO, Michigan
                        CHRIS COLLINS, New York
                        TOM RICE, South Carolina
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                        BRAD SCHNEIDER, Illinois
                          RON BARBER, Arizona
                    ANN McLANE KUSTER, New Hampshire
                        PATRICK MURPHY, Florida

                      Lori Salley, Staff Director
                    Paul Sass, Deputy Staff Director
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director

                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Sam Graves..................................................     1
Hon. Nydia Velazquez.............................................     2

                                APPENDIX

Additional Material for the Record:
    Views and Estimates of the Committee on Small Business on 
      Matters to be set forth in the Concurrent Resolution on the 
      Budget for Fiscal Year 2014................................     5

 
 MEETING TO CONSIDER THE COMMITTEE'S VIEWS AND ESTIMATES ON THE SMALL 
            BUSINESS ADMINISTRATION FISCAL YEAR 2014 BUDGET

                      Wednesday, February 27, 2013

                  House of Representatives,
               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 1 p.m., in Room 
2360, Rayburn House Office Building, Hon. Sam Graves [Chairman 
of the Committee] presiding.
    Present: Representatives Graves, Luetkemeyer, Tipton, 
Herrera Beutler, Hanna, Bentivolio, Collins, Rice, Velazquez, 
Schrader, Hahn, Schneider, Barber and Murphy.
    Chairman Graves. Good afternoon, and we will call the 
meeting to order.
    Today we are going to undertake our responsibility to 
provide views and estimates on the Small Business 
Administration's budget for Fiscal Year 2014. This job is made 
significantly more difficult because the President has not 
complied with his statutory responsibility to deliver a budget 
by the first week of February.
    Given the absence of budgetary data from the President or 
the Administrator of the SBA, the views and estimates suggest 
methods by which the Budget Committee can allocate resources to 
improve the overall efficiency of the SBA programs. This 
entails allocating more funds to critical core programs, while 
eliminating funds for unproven and unauthorized SBA initiative 
efforts.
    The approach offered in the Committee's views and estimates 
is confirmed by Administrator Mills' recent letter to the chair 
of the Senate Appropriations Committee on the potential effect 
of sequestration on SBA programs. Rather than use funds for 
statutorily-mandated initiatives that create jobs, things such 
as the 7(a) and 504 programs, or to prevent fraud in small 
business government contracting programs, the Administrator 
wrote that she would continue to fund an unproven and 
unauthorized regional innovation cluster training program.
    The regional innovation cluster concept has never been 
explained to this Committee or demonstrated to create a single 
job at a small business, but the example of the regional 
innovation cluster simply is symbolic of an agency that 
believes that it, rather than Congress, is the best determiner 
of what will help small businesses.
    The SBA frequently creates pilot programs without any input 
from the public, so the agency is unable to determine what the 
benefits will be or whether they will even work. This lack of 
transparency is not just bad for its own sake--it empowers the 
SBA to take risks with the taxpayer funds, and the public finds 
out only after the pilot program goes bad. One such program has 
cost the SBA $8 million that it is still trying to recoup.
    Similarly the agency created a special type of small 
business investment company without public input, yet the SBA 
still lacks regulations or standard operating procedures that 
specify the rules governing the issuance of licenses for 
someone seeking to operate a small business investment company.
    The views and estimates letter calls for a reallocation of 
the SBA's budget to focus on it core programs, the ones 
authorized by Congress. By necessity such a budget requires 
hard choices, choices that neither the President nor the 
Administrator have provided to this Committee.
    The views and estimates letter recommends that the 
inefficient and duplicative outreach and training programs 
either be terminated or transferred to agencies that have 
greater resources to operate them. Termination would include 
the regional clusters initiative, a program whose only mention 
is in a conference report, and not in any public law signed by 
the President.
    Furthermore, the views and estimates letter recommends the 
allocation of funds only for the agency programs specifically 
enacted by Congress. This will ensure that the SBA focuses its 
scarce financial resources on programs that Congress has 
considered to be effective. Allocating funds to the SBA's 
capital access programs has proven to create jobs according to 
the agency's own recently released research.
    Devoting resources to small business contracting will open 
markets and prevent abuse of those programs. Limiting SBA's 
entrepreneurial development efforts to the largest and best-
funded programs will allow entrepreneurs to obtain the 
necessary education necessary to operate their businesses.
    Another way for the agency to save federal dollars is to 
reduce appropriated funds that cover the costs of the capital 
access programs. Appropriated dollars are needed because the 
fees and recoveries on defaulted loans did not cover the cost 
of the programs. One solution to this problem is increasing 
recoveries on defaulted loans; yet the SBA has never broached 
the subject with this Committee, even during a time when the 
agency claims that its ability to deliver services to small 
businesses will be significantly curtailed. The views and 
estimates letter highlights this issue, and the Committee will 
investigate legislative changes needed to increase recoveries 
on defaulted loans.
    Despite the hard choices set forth in the views and 
estimates letter, the SBA still will be able to make capital 
available, provide advice, increase utilization of small 
businesses as federal government contractors. Ultimately these 
selective reductions in the SBA's budget will reduce federal 
spending without undermining assistance to America's job 
creators--the small businesses.
    Now I recognize Ranking Member Velazquez for her opening 
remarks.
    Ms. Velazquez. Thank you, Mr. Chairman.
    As we sit here, we are hours away from $85 billion in 
across-the-board budget cuts. In that light I will suggest the 
SBA budget offers a stark example of how reducing successful 
programs, some of which actually generate $2 of tax revenue for 
every $1 we invest, is penny wise and pound foolish.
    Consideration of this year's views and estimates certainly 
comes at an odd time, before we have a proposed budget to 
examine. While submission of this document to the Budget 
Committee is an important aspect of the committee's work, doing 
so without an actual budget to critique seems like a 
questionable exercise.
    Some parts of the majority's views and estimates do make 
sense. For example, eliminating many unauthorized initiatives 
or so-called pilot programs is a wise move, especially given 
current fiscal constraints. Time and again these initiatives 
have been found to be ineffective and costly. They divert 
valuable resources away from proven programs authorized by 
Congress. Pilot programs are simply a luxury the SBA can no 
longer afford.
    However, there are several areas of concerns with the views 
and estimates. First and foremost, eliminating funding for most 
entrepreneurial development programs is absolutely the wrong 
direction. Doing so would leave start-ups without support to 
succeed when we need those enterprises to grow and create jobs. 
Make no mistake, the ED programs need reforms. However, drastic 
across-the-board cuts without a legislative fix is as ill 
conceived as the sequester.
    If the views went too far in terms of the ED program, they 
fall short in terms of small business contracting. For yet 
another year the government failed to meet its 23 percent small 
business goal, depriving small firms of $3.1 billion in 
contracting dollars. The solution proposed in the draft views 
is to reallocate funds and rely on the existing structure of 
PCRs and OSDBUs. This has not worked in a decade, and there is 
no evidence suggesting it will work now. We should begin 
exploring innovative ways to meet contracting goals, not 
maintaining the current broken system that fails small 
businesses.
    Taken in its entirety, these views are a mixed bag. 
However, I think we all agree more must be done at SBA in terms 
of setting priorities. I look forward to working with the 
chairman and all my colleagues to achieve this goal.
    The success of the American economy depends on small 
businesses accessing capital, receiving technical support, and 
securing federal contracting opportunities. We should continue 
supporting the SBA in delivering these services. However, 
accomplishing more with less requires the SBA to make changes 
like recommitting itself to existing programs that actually 
work. Doing so will bring tangible benefits to small businesses 
and make sure taxpayers see a positive return on their 
investment.
    Mr. Chairman, thank you, and I yield back.
    Chairman Graves. Are there any other Members that wish to 
be recognized for a statement on views and estimates?
    Seeing none, the Committee now moves to consideration of 
the views and estimates. The clerk will please read the title 
of the document.
    The Clerk. Views and Estimates of the Committee on Small 
Business on Matters To Be Set Forth in the Concurrent 
Resolution on the Budget for Fiscal Year 2014.
    Chairman Graves. Thank you. I would ask unanimous consent 
that the views and estimates be considered as read and open for 
amendment in its entirety.
    Does any Member seek recognition for the purpose of 
offering an amendment?
    Seeing no amendments, the question is adopting the views 
and estimates. All those in favor, say aye.
    All opposed, no.
    In the opinion of the chair, the ayes have it, and the 
views and estimates is adopted.
    And I now recognize our Ranking Member Velazquez for a 
motion.
    Ms. Velazquez. Yes, Mr. Chairman, I want to provide the 
committee notice that the Democratic members will be filing 
separate and dissenting views with the Budget Committee.
    Chairman Graves. Without objection, it is so ordered, and I 
ask unanimous consent that the Committee be authorized to 
correct punctuation and make other necessary grammatical and 
technical corrections on the document considered today.
    And without objection, that is so ordered.
    And the Committee is now adjourned. Thank you.
    [Whereupon, at 1:12 p.m., the Committee was adjourned.]
                            A P P E N D I X

Views and Estimates of the Committee on Small Business on Matters to be 
                    set forth in the Concurrent Resolution on the 
                    Budget for Fiscal Year 2014

    Pursuant to clause 4(f) of Rule X of the Rules of the House 
and  301(d) of the Congressional Budget Act of 1974, 2 U.S.C. 
 632(d), the Committee on Small Business is transmitting 
herein: (1) its views and estimates on all matters within its 
jurisdiction or functions to be set forth in the concurrent 
resolution on the budget for Fiscal Year 2014; and (2) 
recommendations for improved governmental performance.
    Unlike in previous years, the views and estimates set forth 
herein provide no comments on the President's budget since none 
has been submitted for consideration by the Committee; nor has 
the Committee received any testimony from the Administrator of 
the Small Business Administration (SBA) concerning its budget 
request for FY 2014. Given the paucity of information 
forthcoming from the President and the SBA, the views and 
estimates contained herein provide the Committee's 
recommendations on ways to improve performance of the SBA. 
These views and estimates also incorporate by reference the 
views and estimates provided by the Committee on Small Business 
during the 112th Congress.
    The Administrator has noted on multiple occasions before 
the Committee that the SBA provides entrepreneurs with the 
three Cs--capital, contract assistance, and counseling. The 
views and estimates will consider these seriatim.

Capital Access Programs \1\
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    \1\ The SBA disaster loan program provides funds to homeowners and 
small businesses after the President has declared a major disaster as 
that term is defined in the Robert T. Stafford Disaster Relief and 
Emergency Assistance Act, 42 U.S.C.  5121-5208. Funding for the 
Disaster Loan Program was addressed in the Disaster Relief 
Appropriations Act, 2013, Pub. L. No. 113-2. That legislation provides 
sufficient funds for the SBA to meet expected needs for disaster relief 
in the coming year. However, those funds will not be adequate if there 
is another major event such as Hurricane Katrina or Superstorm Sandy. 
In those instances, it is likely that the President would seek a 
supplemental appropriation.
---------------------------------------------------------------------------
    Unlike large enterprises that can seek out funds from 
commercial debt and equity markets, small businesses must rely 
on their own personal assets, retained earnings, and commercial 
bank funds for needed capital. For 60 years (since the 1953 
creation of the SBA during the Eisenhower Administration), the 
SBA has sought to fill gaps in the commercial debt and equity 
markets.

Program Costs

    The four major programs overseen by the SBA are the: 7(a) 
Guaranteed Loan Program (7(a)); Certified Development Company 
(CDC) Loan Program; Small Business Investment Company (SBIC) 
Program; and Microloan Program. In none of these programs does 
the SBA directly provide funds to small businesses; instead, 
the SBA provides funds by guaranteeing the repayment of 
issuance of credit and equity by private-sector partners.\2\
---------------------------------------------------------------------------
    \2\ The textual explanation constitutes an oversimplification of 
these four programs but suffices for the purposes of these views and 
estimates.
---------------------------------------------------------------------------
    The SBA must operate these programs within the parameters 
established by the Federal Credit Reform Act, 2 U.S.C.  661-
61f (FCRA).\3\ The statute requires that all federal agencies 
calculate the current cost \4\ of their credit programs. Id. at 
 661(a), 661a(5). The FCRA, in essence, requires that 
sufficient funds are deposited in those accounts to cover the 
cost of the loans made in any given year. Funds may be obtained 
from fees charged to borrowers, the private sector partners 
that provide the credit, monies appropriated by Congress, or 
some combination of the three. If the programs do not require 
any appropriated dollars, they are considered to be operating 
at zero-subsidy.
---------------------------------------------------------------------------
    \3\ Of course, the SBA is required to operate these lending 
programs according to the strictures established by Congress in the 
Small Business and Small Business Investment Acts.
    \4\ When stripped to its bare essentials, the definition of cost in 
the FCRA simply means the dollar value t of loans year made minus (the 
dollar value of the loans repaid plus the amount of monies recovered 
from defaulted loans). A net present value of this calculation is made 
to obtain the amounts that must be set aside in a current account to 
cover the costs of each lending program.
---------------------------------------------------------------------------
    Two of the programs--7(a) and CDC Loan Programs--were 
redesigned by Congress during the 1990s and the early 2000s to 
operate, to the extent possible, with a zero subsidy. However, 
recent economic conditions required Congress to appropriate 
funds for use by the 7(a) and CDC Loan Programs because the 
fees charged to borrowers and lenders did not cover the cost of 
the programs. To the extent that the President's budget reveals 
the need for appropriations to cover the costs of the loan 
programs as the term cost is defined in the FCRA, the Committee 
believes that the budget resolution should provide sufficient 
funds to do so.
    When this issue has arisen in the past, the Committee has 
considered and rejected increasing the fees charged by 
borrowers and lenders. Given the economic data that small 
businesses generate most of the new jobs in the United States, 
it would be counterproductive at this time to increase the cost 
of credit to small businesses and thereby restrict their 
capacity to create new jobs.
    The Microloan Program operates with a small subsidy due to 
the interest rate charged to microloan intermediaries (the 
entities that actually provide credit to small businesses). 
However, no microloan intermediary has ever defaulted on its 
loans and the minimal historic costs given the benefits of job 
creation strongly militate in favor of providing appropriated 
funds to cover the interest rate differential.
    The primary issue related to the SBIC program is not 
whether it can still operate at zero-subsidy. Given historical 
data, the Committee would expect that the SBIC program will 
continue to operate without any need for appropriations to 
cover the cost of the program as that term is used in the FCRA. 
Rather, the issue with the SBIC program is whether the program 
level will be sufficient to enable it to meet the demand of 
small businesses seeking equity capital. The Committee believes 
that a program level of $4 billion will be sufficient to meet 
the needs of small businesses seeking capital.\5\
---------------------------------------------------------------------------
    \5\ This represents an increase in the program level from FY 2013 
of $1 billion. Given the zero subsidy nature of the program, the 
increase will have no effect on the program cost or the deficit.
---------------------------------------------------------------------------

Recoveries on Defaults

    As already noted, one of the key components of the FCRA 
cost calculation is the amount of monies obtained in recoveries 
on defaulted loans. In previous views and estimates, the 
Committee has noted that the SBA is ill-equipped to handle 
recoveries in its capital access programs. This is true whether 
the recoveries involve defaults in the 7(a) or CDC loan 
programs or through receiverships in the SBIC program.
    The inability to manage the recoveries on defaults 
increases the costs of these programs on lenders, borrowers, 
and taxpayers. For example, the SBA frequently fails to sell 
portfolio companies of SBICs placed into receivership even when 
there are sound offers for such companies. In a more glaring 
example, the credit supplement to the FY 2013 budget revealed 
that returns on defaulted CDC loans were approximately 23 cents 
on the dollar (and only about half of what was received in the 
7(a) loan program).\6\ Simply put, SBA personnel do not have 
the industry expertise (in managing portfolio companies of 
SBICs in receivership) or, in the case of commercial real 
estate, sufficient local knowledge to effectively manage 
distressed properties and businesses. Simply appropriating more 
funds for the SBA will not solve an underlying management 
issue; the Committee will continue to assess legislative 
changes that ensure experts with solid local and industry 
knowledge are placed in charge of conducting recoveries and 
workouts in the SBA capital access programs. In turn, this will 
ensure that the subsidy costs (and the need for appropriated 
monies) will decrease.
---------------------------------------------------------------------------
    \6\ Historically, recoveries in the CDC loan program have been 
between 20 and 25 cents on the dollar. The Committee is unaware of any 
reason that recoveries would be outside this range for FY 2014.
---------------------------------------------------------------------------

Information Technology and Capital Access Programs

    The information technology needed to manage the SBA 
guaranteed loan portfolio is outdated and poses a significant 
risk to the federal fisc. The loan accounting system, first 
developed by the SBA in the 1970s, utilizes COBOL in a 
mainframe environment. The efforts at modernizing this system 
(even a scaled-back version) are behind schedule, lack an 
overall enterprise technology management plan, and suffer from 
cost overruns. This is unacceptable because a modern loan 
accounting system would enable the SBA to manage its loan 
portfolio in a manner that protects the taxpayer, mainly by 
improving returns on recoveries of defaulted loans. Until the 
SBA completes the tasks already established for modernizing its 
loan management accounting system, no additional funds should 
be provided for the agency's information technology.

Lender Oversight and Credit Risk Management

    The problems associated with the development of a modern 
loan management accounting system also undermine the ability of 
the SBA to perform proper lender oversight. If the SBA is 
unable to obtain timely and accurate data on the loans made by 
its private sector partners, the agency will not have the 
information needed to assess the credit risk of its loan 
portfolio or the underwriting standards of its lending 
partners. For a $90 billion loan portfolio, that is simply 
unacceptable, and the SBA must refocus its efforts to ensure 
its loan management accounting system can provide the needed 
data to perform credit risk assessment \7\ and lender 
oversight.
---------------------------------------------------------------------------
    \7\ Although the SBA has a separate credit risk database, the 
accuracy of that system is based, in part, on the data obtained from 
the loan management accounting system. Therefore, absent an accurate 
and modern loan management accounting system, the SBA's credit risk 
database remains flawed.
---------------------------------------------------------------------------
    Information technology is not the only problem facing the 
SBA in performing adequate lender oversight. The agency 
resources are not allocated properly to ensure such lender 
oversight or to take action against a risky lender. As an 
example, the SBA, for the first time in its existence, revoked 
the authority of a CDC to operate in December 2012.\8\ That 
process took nearly two years and a not insignificant portion 
of that time involved the SBA arranging for services to take 
over the loan portfolio of the shuttered CDC. It remains an 
open question whether the SBA has allocated sufficient 
resources to undertake the necessary actions should it revoke 
the authority of other lending partners.
---------------------------------------------------------------------------
    \8\ The Committee is unaware of any instance in which the SBA has 
revoked the authority (for mismanagement or credit riskiness) of a 
lender in the 7(a) Program. Many lenders have lost their authority due 
to the failure to make sufficient loans but none have had their 
authority revoked for mismanagement even when their upper level 
managers committed fraud.
---------------------------------------------------------------------------

Federal Contracting Programs \9\
---------------------------------------------------------------------------

    \9\ An adjunct to the government contracting programs is the SBA 
Surety Bond program that enables small businesses access to surety 
bonds when they otherwise would be unable to obtain such bonds. The 
program operates as zero-subsidy and the Committee expects that it will 
operate without the need for appropriations in FY 2014.
---------------------------------------------------------------------------
    One of the primary missions of the SBA is to ensure that 
small businesses receive a ``fair proportion of the total 
purchases and contracts for property and services for the 
Government in each industry category....'' 15 U.S.C.  644(a). 
To achieve this objective, Congress created a number of 
programs designed to increase opportunities for small 
businesses in a federal market for goods and services that 
reaches $515,697,897,218.85.\10\ SBA utilizes personnel to 
expand opportunities for small businesses; other resources are 
devoted to managing the contracting programs targeted at 
specific subsets of small businesses.
---------------------------------------------------------------------------
    \10\ The statistic was derived from the Federal Procurement Data 
System on February 9, 2013 at 4:30 pm. While some may quibble with the 
accuracy of this figure, it is certainly more accurate than is 
available on the SBA's loan management accounting system.
---------------------------------------------------------------------------
    Budget allocations for the operation of the SBA's 
government contracting programs are subsumed within the 
agency's overall request for salaries and expenses. With 
respect to the contracting programs, it is not the overall 
allocation amount of salaries and expenses that is the problem; 
rather it is how the SBA allocates those resources to the 
government contracting programs that inhibit its ability to 
carry out the various mandates set forth in the Small Business 
Act.
    A key type of personnel at the SBA is the Procurement 
Center Representatives or PCRs. These individuals are located 
at contracting activities (i.e., other federal agencies) and 
constitute the SBA's front line in promoting the use of small 
businesses and first line of defense against contract bundling. 
Despite their importance in achieving the objectives Congress 
set out in  15(a) of the Small Business Act, less than 3 
percent of the personnel at the agency are PCRs. Funds should 
be reallocated so that the SBA actually dedicates the necessary 
personnel so that PCRs can perform their jobs in an effective 
manner, rather than the current situation in which the 
approximately 60 PCRs must each review about $8.6 billion 
dollars in government contracts.
    The SBA oversees the operations of a number of contracting 
programs targeted at specific segments of the small business 
community. These contracting programs present a number of 
vulnerabilities: (1) small businesses might misrepresent their 
size (and not actually be small); (2) small businesses may 
misrepresent their status for purposes of eligibility, such as 
not being a woman-owned and controlled business; or (3) small 
businesses do not perform the necessary quantum of work on the 
contract. Given these vulnerabilities, there are key defenses--
adequate personnel to check the small businesses and updated 
databases for use by contractors and federal contracting 
officers. While the SBA has made strides in correcting these 
vulnerabilities, greater resources need to be allocated to 
ensure that only eligible businesses obtain contracts in 
programs established pursuant to the Small Business Act.

Counseling Programs \11\
---------------------------------------------------------------------------

    \11\ The SBA denominates these programs as entrepreneurial 
development but all provide counseling to small business owners and 
those individuals wishing to embark on entrepreneurship. Given the 
overall theme of these views and estimates, the Committee will utilize 
the term ``counseling'' rather than the SBA programmatic designation.
---------------------------------------------------------------------------
    While the SBA underallocates resources in critical areas, 
such as lender oversight and government contracting programs, 
the agency overallocates funds and personnel to provide 
counseling for small business owners. No one should question 
the value of training for small business owners and those whose 
wish to start small businesses. However, in times of budgetary 
restrictions, hard choices must be made. This is particularly 
true when the counseling programs at the SBA overlap each other 
and often duplicate the educational services provided by other 
agencies.
    The Government Accountability Office (GAO) identified 54 
programs at the SBA and the Departments of Commerce, 
Agriculture, and Housing and Urban Development that provide 
counseling services to small businesses.\12\ Other studies have 
found similar duplication in outreach efforts for veterans.\13\ 
Presumably other areas of entrepreneurial outreach and 
duplication exist between the SBA and other federal agencies. 
In addition to overseeing counseling programs authorized by 
Congress, the SBA exacerbates this overallocation of resources 
to entrepreneurial outreach by creating its own programs 
unauthorized by Congress, such as the development of regional 
clusters and establishment of an Emerging Leaders Program; 
programs which utilize scarce federal resources and have no 
proven track record of success.
---------------------------------------------------------------------------
    \12\ GAO, Economic Development, Efficiency and Effectiveness of 
Fragmented Programs are Unclear 3-4 (2011) (GAO-11-651T).
    \13\ Institute for Veterans and Military Families, Syracuse 
University, A National Veterans Strategy: The Economic, Social and 
Security Imperative 5 (2013), available at http://vets.syr.edu/wp-
content/uploads/2013/02/National-Strategy-PublicationFINAL.pdf.
---------------------------------------------------------------------------
    Given tight budgetary constraints and the need for the SBA 
to reallocate resources in other critical areas, 
entrepreneurial outreach at the SBA should be limited to one 
program with a broad mission, the access points needed to 
provide assistance in the most locations, and capable of 
obtaining non-federal funds to help defray costs. Only one 
counseling program overseen by the SBA meets this standard--the 
Small Business Development Center (SBDC) Program. All other 
entrepreneurial outreach efforts at the SBA either overlap with 
the SBDC Program or duplicate efforts at other federal 
agencies. As a result, they either should be folded into the 
mission of the SBDC Program or their responsibilities should be 
taken over by other agencies.\14\ This consolidation should 
include the cessation of any entrepreneurial outreach efforts 
created by the SBA without the express authorization of 
Congress. Once that action has been taken, the SBA should work 
with these other agencies and the SBDCs to coordinate the 
delivery of counseling services for entrepreneurs.
---------------------------------------------------------------------------
    \14\ For example, the Department of Agriculture has greater 
resources to provide training and outreach to small businesses located 
in rural areas than the SBA. Thus, the functions and mission of the 
Office of Rural Affairs at the SBA can be transferred to the Department 
of Agriculture.
---------------------------------------------------------------------------

Pilot Programs, Lack of Transparency and Ad Hoc Decisionmaking

    The SBA also establishes its own initiatives in the capital 
access programs (colloquially denominated at ``pilot 
programs''). In some instances the agency does so under broad 
legislative mandate;\15\ at other times it does so without any 
express authorization from Congress. Frequently, these 
initiatives are established while programs specifically 
authorized by Congress have yet to be implemented.\16\
---------------------------------------------------------------------------
    \15\ Congress ceded to the agency limited authority to create pilot 
programs in the 7(a) loan Program. 15 U.S.C. Sec. 636(a)(25).
    \16\ For example, the SBA has yet to promulgate regulations for the 
establishment of the renewable fuels investment companies under the 
SBIC program that Congress authorized in 2007. Despite this failure, 
the SBA created two other initiatives within the SBIC program during 
the past two years--the Impact Investment and Early-Stage Innovation 
Funds. Such derogation of Congressional mandates is inexcusable.
---------------------------------------------------------------------------
    Generally, these capital access pilot programs are created 
through the issuance of standard operating procedures (SOPs). 
These SOPs are never issued pursuant to the notice and comment 
process set forth in the Administrative Procedure Act 
(APA).\17\ Absent input from the public, the SBA has no way to 
assess whether these pilot programs will meet the equity and 
debt needs of small businesses or be used by its lending 
partners. In certain instances, these initiatives place the 
federal taxpayer at risk.\18\ SBA must be more transparent in 
promulgating regulations and guidance to ensure that changes in 
their capital access programs provide necessary assistance to 
small businesses.
---------------------------------------------------------------------------
    \17\ To be sure, the loan programs are specifically excluded from 
the requirements of notice and comment in the APA, 5 U.S.C. 
Sec. 553(a)(2). However, the SBA codified a regulation that requires 
the agency to conduct rulemaking pursuant to the notice and comment 
requirements of the APA even though the rulemaking otherwise would be 
exempt. 13 C.F.R. Sec. 101.108. It is an abecedarian tenet of 
administrative law that an agency must comply with its own regulations. 
Accardi v. Shaughnessy, 347 U.S. 260, 265-67 (1954); Brock v. Cathedral 
Bluffs Shale Oil Co. 796 F.2d 533, 536 (D.C. Cir. 1986). Some of the 
SOPs create obligations on both the agency and small businesses, 
including pilot programs. As a result, these SOPs must be issued 
pursuant to notice and comment. Cf. Appalachian Power Co. v. EPA, 208 
F.3d 1015, 1028 (D.C. Cir. 2000) (imposition of monitoring guidance for 
power plants must be issued through notice and comment); National Ski 
Areas Ass'n v. United States Forest Serv., 2012 Lexis 197335, at *24-27 
(D. Colo.) (directives placed in Forest Service Manual constitute rules 
requiring notice and comment).
    \18\ One pilot program, a liquidation pilot in the CDC program, 
cost the agency about $8 million dollars, which it is trying to recoup.
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    The lack of transparency in the operation of the capital 
access programs goes beyond the failure to obtain public input. 
In some instances, the SBA creates new procedures, such as for 
licensing of SBICs, without the concomitant changes in the SBA 
regulations or even the SOPs. For example, the extant SOP for 
licensing of SBICs was issued in 1984, has not been updated, 
and has not been followed by the agency for years. In other 
cases, the SBA will cite its authority to waive any of its 
regulations. 13 C.F.R. Sec. 120.3, to operate the capital 
access programs in any manner that the agency believes is 
appropriate.
    This makes it quite possible for the SBA to create ad hoc 
unwritten determinations that treat similarly situated 
individuals differently--agency action that has been prohibited 
since the enactment of the APA in 1946.\19\ This lack of 
transparency does not represent good agency management, will 
not ensure that proper assistance is provided to small 
businesses, and may place the federal taxpayer at increased 
risk from faulty operation of the capital access programs. The 
Committee will consider legislative action to foreclose the ad 
hoc decisionmaking by the agency.
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    \19\ Morton v. Ruiz, 415 U.S. 199, 232 (1974).
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SBA Management and Administration

    The views and estimates already established the case for 
the reallocation of resources within the SBA. One potential 
avenue for finding the needed resources is the current 
structure of the agency.

Personnel in the 10 Federal Regions

    The SBA provides most of its services to small businesses 
through 84 district offices that are staffed with personnel who 
are knowledgeable on a variety of small business related 
topics. When a small business owner or entrepreneur has contact 
with an agency official, it is typically at a district 
office.\20\ Those district offices are overseen by an Office of 
Field Operations at SBA headquarters in Washington, DC. Despite 
this agency structure, the SBA also has ten regional 
administrators, regional communication officials and support 
staff. It remains unclear what management function or 
responsibility these regional administrators or regional 
offices have. Given that, the Committee believes that the 
position of regional administrator should be eliminated. 
Without regional administrators, there would be no reason to 
have regional offices and the Committee recommends that those 
offices be shuttered.
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    \20\ The primary exception to this would be when an individual is 
applying for a disaster loan. In those cases, the applicant will be 
dealing with on-site field personnel and disaster loan call centers.
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    Another office at the SBA with ten regional representatives 
is the Office of the Chief Counsel for Advocacy. The primary 
responsibility of that office is to monitor agency compliance 
with the Regulatory Flexibility Act, a statute mandating 
agencies examine the impact of their proposed and final rules 
on small businesses. While input from small businesses is quite 
useful in performing that role, the office does not need 
regional representatives to obtain that input. As a result, the 
Committee believes that the Office of the Chief Counsel's 
regional personnel should be eliminated. However, rather than 
simply eliminate all ten positions from the Office of the Chief 
Counsel for Advocacy, the Committee recommends that five 
additional positions be created to review federal agency 
compliance with the Regulatory Flexibility Act. This would 
result in a net savings of five individuals in the office while 
boosting its capability to fight burdensome regulations 
inhibiting the ability of small businesses to create jobs.

District Personnel

    As already noted, the SBA's primary contact with small 
businesses is through its district offices. The district 
offices are, logically enough, headed by a district director. 
However, in about 75 percent of the offices, there also is a 
deputy district director. The Committee is of the opinion that 
district offices do not need a separate, dedicated individual 
to be the deputy. If the district director is unavailable (due 
to vacation or illness), that person simply can appoint someone 
to act temporarily as the district director. The Committee 
strongly recommends that no monies be allocated to pay for 
individuals whose sole job is to act as a deputy district 
director. Instead, deputy district directors should be 
reassigned to other functions at the agencies that provide 
direct assistance to small businesses.

Headquarters Structure

    According to the agency, there about 600 people at SBA 
headquarters leaving approximately 1,600 people to interact 
with small businesses in their field operations.\21\ Given the 
fact that there are about 28 million small businesses in the 
United States, the Committee finds that the agency structure is 
too concentrated at headquarters in Washington, DC. This would 
include an Office of Policy with an apparently amorphous 
mission and a personal office of the Administrator that is the 
same size as that of the Secretaries of Defense or 
Agriculture.\22\ This is unacceptable to the Committee and it 
recommends a 10 percent reduction in funds for the Office of 
the Administrator and that no funds should be provided to fund 
the Office of Policy.
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    \21\ Not all field personnel are located at district offices. The 
SBA also has major employment centers to process loans (thereby 
speeding credit to small businesses) and a disaster loan call center 
(to help those seeking to rebuild after a disaster).
    \22\ Secretary Vilsack and Secretary Panetta are able to manage 
much larger agencies (the Departments of Agriculture and Defense, 
respectively) with only 13 individuals in each of their personal 
offices.
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