Small Business Administration: Preliminary Views on Increasing Collaboration with Department of Agriculture Rural Development Offices
Published: 2007-11-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Small Business Administration (SBA) and Department of Agriculture (USDA) Rural Development offices share a mission of attending to underserved markets, promoting economic development, and improving the quality of life in America through the promotion of entrepreneurship and community development. In the past, these agencies have had cooperative working relationships to help manage their respective rural loan and economic development programs. At this subcommittee's request, GAO has undertaken a review of potential opportunities for SBA to seek increased collaboration and cooperation with USDA Rural Development (Rural Development), particularly given Rural Development's large and recognizable presence in rural communities. In this testimony, GAO provides preliminary views on (1) mechanisms that SBA and USDA have used to facilitate collaboration with other federal agencies and with each other; (2) the organization of SBA and USDA Rural Development field offices; and (3) the planned approach for GAO's recently initiated evaluation on collaboration between SBA and Rural Development. GAO discussed the contents of this testimony with SBA and USDA officials.
section_title: What GAO Found
paragraphs: While SBA and Rural Development are not currently involved in a collaborative working relationship, SBA and Rural Development have used a number of different mechanisms, both formal and informal, to collaborate with other agencies and each other. For example, both agencies have used the Economy Act--a general statutory provision that permits federal agencies, under certain circumstances, to enter into mutual agreements with other federal agencies to purchase goods or services and take advantage of specialized experience or expertise. SBA and USDA used the act to enter into an interagency agreement to create rural business investment companies to provide equity investments to rural small businesses. For this initiative, Congress also authorized USDA and SBA to administer the Rural Business Investment Program to create these investment companies. However, funding for this program was rescinded at the end of fiscal year 2006. SBA and Rural Development have also used other mechanisms to collaborate, including memorandums of understanding (MOU), contractual agreements, and other legal authorities. For instance, Rural Development has collaborated with the Federal Emergency Management Agency in providing assistance to the victims of Hurricane Katrina using the disaster provisions under its multifamily and single-family rural housing programs. To collaborate with each other, in the past SBA and Rural Development have established MOUs to ensure coordination of programs and activities between the two agencies and improve effectiveness in promoting rural development. Both SBA and Rural Development have undergone restructuring that has resulted in downsizing and greater centralization of each agency's field operations. Currently, SBA's 68 field offices--many of them in urban centers--are still undergoing the transformation to a more centralized structure. Rural Development has largely completed the transformation and continues to have a large presence in rural areas through a network of hundreds of field offices. The program's recognized presence in rural areas and expertise in the issues and challenges facing rural lenders and small businesses may make these offices appropriate partners to help deliver SBA services. GAO has recently begun a review of the potential for increased collaboration between SBA and Rural Development. In general, the major objectives are to examine the differences and similarities between SBA loan programs and Rural Development business programs, any cooperation that is already taking place between SBA and Rural Development, and any opportunities for or barriers to collaboration.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our preliminary views on the  potential for increased collaboration between the Small Business  Administration (SBA) and Department of Agriculture (USDA) Rural  Development offices. Given the downsizing that has occurred at SBA  district offices and related changes in roles and responsibilities, this is an  opportune time to examine the potential for collaboration between SBA  and USDA Rural Development (Rural Development). Collaboration that  cuts across more than one federal agency is one way for agencies to  deliver results more efficiently and in a way that is consistent with  multiple demands and limited resources.
Over 80 programs administered by several different federal agencies target  rural economic development. Of these, SBA and Rural Development share  a mission of attending to underserved markets, fostering economic  development, and improving the quality of life in America through the  promotion of entrepreneurship and community development. Both  agencies offer business loans and grant programs for rural development  and play a vital role in spurring economic growth in rural areas. In the  past, these agencies have developed cooperative working relationships to  help manage their respective rural loan and economic development  programs. Additionally, Congress created the Rural Business Investment  Program (RBIP) in 2002, which authorized USDA to enter into a joint  agreement with SBA to create investment companies that would provide  equity investments to rural small businesses. At this subcommittee’s  request, we are exploring possible opportunities for SBA to seek increased  collaboration and cooperation with USDA Rural Development, particularly  considering Rural Development’s large and recognizable presence in rural  communities across the country.
In my testimony, I will provide preliminary views on (1) mechanisms that  SBA and USDA have used to facilitate collaboration with other federal  agencies and with each other; (2) the organization of SBA and USDA Rural  Development field offices; and (3) the planned approach for our recently  initiated evaluation on collaboration between SBA and USDA Rural  Development undertaken at your request, including how we plan to apply  the best practices for effective collaboration that we identified in prior  work.
In conducting this work to date, we met with SBA and USDA officials;  obtained information on SBA and Rural Development loan and business  programs; and reviewed information from previous GAO reports on the  two agencies as well as on practices that can help enhance collaboration  among federal agencies.
While SBA and Rural Development are not currently involved in a  collaborative working relationship, SBA and Rural Development have used  a number of different mechanisms, both formal and informal, to  collaborate with other agencies and each other. For example, both  agencies have used the Economy Act—a general statutory provision that  permits federal agencies, under certain circumstances, to enter into  mutual agreements with other federal agencies to purchase goods or  services and take advantage of specialized experience or expertise. SBA  and USDA used the act to enter into an interagency agreement to create  rural business investment companies to provide equity investments to  rural small businesses. For this initiative, Congress also authorized USDA  and SBA to administer the RBIP to create these investment companies.  However, funding for this program was rescinded at the end of fiscal year  2006. SBA and Rural Development have also used other mechanisms to  collaborate, including memorandums of understanding (MOU),  contractual agreements, and other legal authorities. For instance, Rural  Development has collaborated with the Federal Emergency Management  Agency in providing assistance to the victims of Hurricane Katrina using  the disaster provisions under its multifamily and single-family rural  housing programs. To collaborate with each other, in the past SBA and  Rural Development have established MOUs to ensure coordination of   programs and activities between the two agencies and improve  effectiveness in promoting rural development.
Both SBA and Rural Development have undergone restructuring that has  resulted in the downsizing and greater centralization of each agency’s field  operations. Currently, SBA’s 68 field offices—many of them in urban  centers—are still undergoing the transformation to a more centralized  structure. Rural Development has largely completed the transformation  but continues to have a large presence in rural areas through a network of  hundreds of field offices. The program’s recognized presence in rural areas  and expertise in the issues and challenges facing rural lenders and small  businesses may make these offices appropriate partners to help deliver  SBA services.
We have recently begun a review of the potential for increased  collaboration between SBA and Rural Development. In general, the major  objectives are to examine the differences and similarities between SBA  loan programs and Rural Development business programs, any  cooperation that is already taking place between SBA and Rural  Development, and any opportunities for or barriers to collaboration.  Among other things, we plan to review relevant laws, regulations, and  policies to determine what opportunities or barriers exist to cooperation  and collaboration between SBA and Rural Development; evaluate each  agency’s field structure to determine what opportunities, if any, exist for  increased collaboration; contact SBA and Rural Development staff in  headquarters and visit selected field offices to determine what cooperation  is already taking place between SBA and Rural Development; and  interview select lenders that participate in SBA loan programs and Rural  Development business programs to obtain their perspectives on SBA loan  programs and Rural Development business programs.
We are continuing to design the scope and methodology for our work, and  we expect to complete this design phase by February 2008. We discussed  the contents of this testimony with SBA and USDA officials.
subsections: section_title: Background
paragraphs: USDA is, by law, charged with leading and coordinating federal rural  development assistance. USDA Rural Development administers the  greatest number of development programs for rural communities and  directs the highest average amount of federal program funds to these  communities. Most of Rural Development’s programs and activities  provide assistance in the form of loans, loan guarantees, and grants. Three  offices are primarily responsible for carrying out this mission: the Rural  Business-Cooperative Service (RBS), Rural Housing Service (RHS), and  Rural Utilities Service (RUS). RBS administers programs that provide  financial, business planning, and technical assistance to rural businesses  and cooperatives that receive Rural Development financial assistance. It  also helps fund projects that create or preserve jobs in rural areas. RHS  administers community facilities and housing programs that help finance  new or improved housing for moderate-, low-, and very low-income  families. RUS administers electric, telecommunications, and water  programs that help finance the infrastructure necessary to improve the  quality of life and promote economic development in rural areas.
Since its beginning in 1953, SBA has steadily increased the amount of total  assistance it provides to small businesses, including those in rural areas,  and expanded its array of programs for these businesses. SBA’s programs  now include business and disaster relief loans, loan guarantees,  investment capital, contract procurement and management assistance, and  specialized outreach. SBA’s loan programs include its 7(a) loan guarantee  program, which guarantees loans made by commercial lenders to small  businesses for working capital and other general business purposes, and  its 504 loan program, which provides long-term, fixed-rate financing for  major fixed assets, such as land and buildings. These loans are generally  provided through participating lenders, up to a maximum loan amount of  $2 million. SBA also administers the Small Business Investment Company  (SBIC) program—a program that provides long-term loans and venture  capital to small firms.
In September 2007, SBA announced a new loan initiative designed to  stimulate economic growth in rural areas. The Rural Lender Advantage  program, a part of SBA’s 7 (a) loan program, is aimed at encouraging rural  lenders to finance small businesses. It is part of a broader initiative to  boost economies in regions that face unique challenges due to factors such  as declining population or high unemployment.
section_title: SBA and USDA Rural Development Have Used a Variety of Mechanisms to Collaborate with Other Federal Agencies and with Each Other
paragraphs: Generally speaking, collaboration involves any joint activity that is  intended to produce more public value than could be produced when the  agencies act alone. Collaboration efforts are often aimed at establishing  approaches to working together; clarifying priorities, roles and  responsibilities; and aligning resources to accomplish common outcomes.  On the federal level, collaboration efforts tend to occur through  interagency agreements, partnerships with state and local governments  and communities, and informal methods (e.g. networking activities,  meetings, conferences, or other discussions on specific projects or  initiatives). Agencies use a number of different mechanisms to collaborate  with each other, including MOUs, procurement and other contractual  agreements, and various legal authorities.
Both SBA and USDA have used the authority provided by the Economy  Act to facilitate collaboration. The Economy Act is a general statutory  provision that permits federal agencies to enter into mutual agreements  with other federal agencies to purchase goods or services and take  advantage of specialized experience or expertise. It is the most commonly  used authority for interagency agreements, allowing agencies to work  together to obtain items or services from each other that cannot be  obtained as conveniently or economically from a private source.
SBA has also used contractual work agreements to collaborate with other  federal agencies. For example, SBA has an agreement with the Farm  Credit Administration (FCA) to examine SBA’s Small Business Lending  Companies (SBLC). SBA oversees SBLCs, which are nondepository  lending institutions that it licenses and that play a significant role in SBA’s  7(a) Loan Guaranty Program. However, SBLCs are not generally regulated  or examined by financial institution regulators. SBA entered into a  contractual agreement with the FCA in 1999 that tasked FCA with  conducting safety and soundness examinations of SBA’s SBLCs. Under  the agreement, FCA examined 14 SBLCs during a 1-year period. The exams  were conducted on a full cost recovery basis and gave both agencies the  option to terminate or extend the agreement after a year. The agreement  allowed SBA to take advantage of FCA’s expertise in examining  specialized financial institutions and offered FCA the opportunity to  broaden its experience through exposure to a different lending  environment.
Additionally, using the disaster provisions under its traditional multifamily  and single- family rural housing programs, Rural Development  collaborated with FEMA in providing assistance to hurricane victims.  Through this collaborative effort, Rural Development assisted victims of  Katrina by (1) making multifamily rental units available nationwide; (2)  providing grants and loans for home repair and replacement; and (3)  providing mortgage relief through a foreclosure moratorium and mortgage  payment forbearance. Rural Development also shared information with  FEMA on USDA-owned homes for lease, developed an Internet presence  to inform victims of available housing, and made resources available at  Rural Development state offices to assist in these efforts.
While SBA and Rural Development are not currently involved in a  collaborative working relationship, both agencies have some experience  collaborating with each other on issues involving rural development.  Specifically, on February 22, 1977, SBA and Rural Development  established an MOU for the purpose of coordinating and cooperating in  the use of their respective loan-making authorities. Under the general  guidelines of the agreement, appropriate SBA and Rural Development  officials were to establish a liaison and periodically coordinate their  activities to (1) define areas of cooperation, (2) assure that intended  recipients received assistance, (3) enable both agencies to provide  expeditious service, and (4) provide maximum utilization of resources.
Again on March 30, 1988, SBA and Rural Development agreed to enter into  a cooperative relationship designed to encourage and maximize  effectiveness in promoting rural development. The MOU outlined each  agency’s responsibilities to (1) coordinate program delivery services and  (2) cooperate with other private sector and federal, state, and local  agencies to ensure that all available resources worked together to promote  rural development. SBA and Rural Development officials told us that the  1977 and 1988 agreements had elapsed and had not been renewed.
Finally, in creating the RBIP in 2002, Congress authorized Rural  Development and SBA to enter into an interagency agreement to create  rural business investment companies. Under the program, the investment  companies would leverage capital raised from private investors, including  rural residents, into investments in rural small businesses. The legislation  recommended that Rural Development manage the RBIP with the  assistance of SBA because of SBA’s investment expertise and experience  and because the program was modeled after SBA’s SBIC program. The  legislation provided funding to cover SBA’s costs of providing such  assistance. A total of $10 million was available for the RBIP in fiscal years  2005 and 2006.
Rural Development and SBA conditionally elected to fund three rural  business investment companies. However, according to SBA officials only  one of these companies has been formed because of challenges in finding  investment companies that can undertake such investments. Section 1403  of the Deficit Reduction Act of 2005 rescinded funding for the program at  the end of fiscal year 2006. In March 2007, Rural Development began the  process of exploring ways to continue the RBIP, despite the rescission.
section_title: SBA and Rural Development Both Have a Field Office Network, but Rural Development Appears to Have a More Recognized Presence in Rural Areas
paragraphs: Both SBA and Rural Development have field offices in locations across the  United States. However, Rural Development has more state and local field  offices and is a more recognized presence in rural areas than SBA. Prior to  its 1994 reorganization, which resulted in a more centralized structure,  USDA had field staff in almost every rural county. Consistent with its  reorganization, and as we reported in September 2000, USDA closed or  consolidated about 1,500 county offices into USDA service centers and  transferred over 600 Rural Development field positions to the St. Louis  Centralized Servicing Center. What resulted was a Rural Development  field office structure that consisted of about 50 state offices, 145 area  offices, and 670 local offices. As part of the reorganization, state Rural  Development offices were given the authority to develop their own  program delivery systems. Some states did not change, believing that they  needed to maintain a county-based structure with a fixed local presence to  deliver one-on-one services to rural areas. Other states consolidated their  local offices to form district offices. For example, when we performed our  audit work in 2000 we found that Mississippi, which maintains a county- based field structure, had more staff and field offices than any other state.  Today, Mississippi still maintains that structure and has a large number of  field offices, including 2 area offices, 24 local offices and 3 sub-area  offices. The Maine Rural Development office changed its operational  structure, moving from 28 offices before the reorganization to 15  afterward. In 2000, it operated out of 3 district offices and currently has 4  area offices.
SBA currently has 68 district offices, many of which are not located in  rural communities or are not readily accessible to rural small businesses.  For several years, SBA has been centralizing some of the functions of its  district offices to improve efficiency and consistency in approving,  servicing, and liquidating loans. Concurrently, SBA has also been moving  more toward partnering with outside entities such as private sector  lenders to provide services. SBA’s district offices were initially created to  be the local delivery system for SBA’s programs, but as SBA has  centralized functions and placed more responsibilities on its lending  partners, the district offices’ responsibilities have changed. For example,  the processing and servicing of a majority of SBA’s loans—work once  handled largely by district office staff—have been moved from district  offices to service centers. Moreover, as we reported in October 2001, there  has been confusion over the mission of the district offices, with SBA  headquarters officials believing the district office’s key customers are  small businesses and district office staff believing that their key customers  are the lenders who make the loans. Currently, SBA is continuing its  workforce transformation efforts to, among other things, better define the  district office role to focus on marketing and outreach to small  businesses.
We plan to evaluate the extent to which Rural Development offices may be  able to help market SBA programs and services by making information  available through their district offices. It appears that Rural Development  has an extensive physical infrastructure in rural areas and expertise in  working with rural lenders and small businesses. Our ongoing work will  explore these issues in more depth, including looking at any incentives  that exist for Rural Development and SBA to collaborate with each other.
section_title: Our Ongoing Work Will Study the Potential for Increased Collaboration between SBA and Rural Development
paragraphs: You requested that we conduct a review of the potential for increased  collaboration between SBA and Rural Development, and we have recently  begun this work. In general, the major objectives of our review are to  determine:  1.  The differences and similarities between SBA loan programs and Rural  2.  The kind of cooperation that is already taking place between SBA and  Rural Development offices, and  3.  Any opportunities or barriers that may exist to cooperation and  collaboration between SBA and Rural Development.
To assess the differences and similarities between SBA loan programs and  Rural Development business programs, we will review relevant SBA and  Rural Development documents describing their loan and business  programs. We will examine relevant laws, regulations, policies, and  program rules, including eligibility requirements and types of assistance,  funding levels, and eligible use of program funds. We will obtain data on  both agencies’ loan processes and procedures, including any agency goals  for awarding loans, documentation requirements, and loan processing  times.
To determine what cooperation has taken place between SBA and Rural  Development, we will examine previous collaboration efforts and  cooperation between the agencies in providing programs and services. We  will also review documents such as MOUs, informal interagency  agreements, and other documentation and will conduct interviews with  SBA and Rural Development staff at headquarters and field offices to  obtain a fuller understanding of these initiatives.
To determine what opportunities or barriers exist to cooperation and  collaboration between SBA and Rural Development, we will review  relevant laws, regulations, and policies. We will review data from SBA and  Rural Development on each agency’s field structure, including office space  and personnel, and interview relevant parties on the advantages and  disadvantages to co-locating offices. We plan to interview headquarters  and field office staff at each agency about past collaboration efforts and  any plans to work collaboratively in the future. We also plan to obtain the  perspectives of select lenders that participate in SBA loan programs and  Rural Development business programs.
We reported previously in March 2007 and October 2005 that effective  collaboration can occur between agencies if they take a more systematic  approach to agreeing on roles and responsibilities and establishing  compatible goals, policies, and procedures on how to use available  resources as efficiently as possible. In doing so, we identified certain key  practices that agencies such as SBA and USDA could use to help enhance  and sustain their efforts to work collaboratively. These practices include  (1) defining and articulating a common outcome; (2) establishing mutually  reinforcing or joint strategies; (3) identifying and addressing needs by  leveraging resources; (4) agreeing on roles and responsibilities; (5)  establishing compatible policies, procedures, and other means of  operating across agency boundaries; (6) developing mechanisms to  monitor, evaluate, and report on results; (7) reinforcing agency  accountability for collaborative efforts; and (8) reinforcing individual  accountability for collaborative efforts. As part of our ongoing work, we  plan to review the extent to which the eight key practices relate to  possible opportunities for SBA to increase collaboration with Rural  Development. For example, we plan to explore the extent to which these  practices are necessary elements for SBA to have a collaborative  relationship with Rural Development.
We are continuing to design the scope and methodology for our work, and  we expect to complete this design phase by February 2008. At that time,  we will provide details of our approach as well as a committed issuance  date for our final report.
Mr. Chairman, Ranking Member Fortenberry, and Members of the  Subcommittee, this concludes my prepared statement. I would be happy to  respond to any questions that you may have.
section_title: Contact and Acknowledgments
paragraphs: For additional information about this testimony, please contact William B.  Shear at (202) 512-8678 or shearw@gao.gov. Contact points for our Offices  of Congressional Affairs and Public Affairs may be found on the last page  of this statement. Individuals making key contributions to this testimony  included Paul Schmidt, Assistant Director; Michelle Bowsky; Tania  Calhoun; Emily Chalmers; and Ronald Ito.
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