In recent weeks, President Obama has traveled the country calling for renewed government spending to foster small-company innovation, but on Monday his administration unveiled a Small Business Administration budget (pdf) for 2012 that limits growth in its most important program, government-guaranteed general business loans. It proposes making cuts, modest and substantial, to other S.B.A. programs as well, and would eliminate two initiatives altogether. Still, over all the cuts are not as drastic as the administration may want to convey.
All told, the Obama administration seeks $985 million in new spending for the agency — or $818 million for small-business programs, after subtracting funds for administering disaster loans, an S.B.A. function that is only marginally related to the agency’s small-business mission (and one that fluctuates wildly in response to events). That is just over half of what it received for these programs in 2010, when the agency was engorged with supplemental stimulus money to spur lending and borrowing.
Congress has yet to pass a budget for fiscal year 2011, and unless it does, spending will remain at 2010 levels, excluding the stimulus money. If $818 million still seems like a big number — should Congress bless the administration proposal, it would be the highest annual appropriation for the agency, in nominal dollars, since at least 2000 — it chiefly reflects the higher cost of subsidizing loans, rather than an expansion of the agency’s services.
In the general business, or 7(a), loan program, the S.B.A. guarantees 85 percent of loans up to $150,000 and 75 percent of loans up to $5 million. The S.B.A., like all federal agencies that make or guarantee loans, must account for the cost of that lending in its annual budget by projecting the share of loans likely to fail and then spreading that cost across the entire pool. For loans made from 2005 to 2008, “the collateral that people had, particularly real estate, was quite inflated,” said the S.B.A. administrator, Karen G. Mills, in a conference call with reporters. “And as a result of those assets really not having the value that they did in that time, we are seeing losses from that cohort in the portfolio.” Those losses have driven up the cost of the subsidy, which is currently shared by taxpayers and S.B.A. lenders and borrowers, who pay a fee on each loan.
For its fiscal year 2012, which will begin in October 2011, the administration is asking for a subsidy that would permit up to $16.5 billion in 7(a) lending. That is $1 billion less than what the S.B.A. sought for fiscal year 2011, and less than it loaned in calendar year 2010, when extended Recovery Actprovisions made 7(a) loans unusually attractive by raising the guarantee to 90 percent and eliminating fees. Demand for 7(a) loans has fallen sharply since those provisions expired at the end of last year, said Ms. Mills, and while the agency expects an uptick, it doesn’t expect to have to turn borrowers away. (Even in pre-recession years, 7(a) lending did not top this ceiling.) But, she added, the S.B.A. already charges borrowers and lenders the most it is allowed by law, so if Congress appropriates a smaller subsidy, the agency will be forced to guarantee still fewer loans. “The subsidy only lasts for so many loans, and that restricts our ability to meet market needs,” said Ms. Mills.
The agency’s microloan program would be hit harder. Microloans are small loans to very small businesses, typically in low-income areas, made by nonprofit organizations with money borrowed from the S.B.A.; the nonprofits also provide training and other technical assistance to borrowers.* The Recovery Act essentially doubled the amount of money the S.B.A. had to loan to microlenders, which quickly absorbed the extra funds. But that, too, has been spent, and as with guaranteed loans, the subsidy expense of making microloans has risen substantially, said an S.B.A. spokesman, Jonathan Swain. The agency will seek to cap its lending at not more than $25 million, the same limit in place for 2011 but well below the $40 million actually provided in both 2009 and 2010. The administration’s budget also proposes a deep cut in funding for the counseling that accompanies microloans — $10 million, down from $22 million in 2010.
Adding to the pressure on these programs is the Small Business Jobs Act that became law last September, which noticeably raised the top loan sizes for most guaranteed loans and microloans. In the microloan program particularly, where demand for loans could easily outstrip supply, larger loans may well mean fewer loans, further constricting the program’s reach.
In the conference call, Ms. Mills stuck to the theme of making difficult choices that Mr. Obama has sounded in recent speeches. “It’s critical that as we go forward with our budgets, we continue to support small business,” she said. “We have to make sure that they can find ways to grow and innovate and create jobs as we come out of the recession, and there’s still work to be done.” But, she added, “even agencies like the S.B.A. have to tighten our belt, too.” The administration apparently believes that there is more political mileage to be gained at the moment by emphasizing its willingness to hurt the ones it loves over its commitment to helping small businesses create jobs — a summary of the budget sent to reporters highlighted the 45 percent cut from 2010 levels, even though the stimulus funding was an extraordinary circumstance.
The president’s budget also proposes spending less on business counseling.Small-business development centers, which are jointly paid for by the S.B.A. and state or local governments, would receive $10 million less from the S.B.A., a cut of nearly 9 percent. The agency would also eliminate a separate small counseling program for the sorts of very small businesses that might be eligible for microloans, as well as a drug-free workplace program, which together would save $9 million. Other counseling programs, including Score, would maintain their funding levels or see slight increases.
Programs that help disadvantaged businesses win government contracts, which have seen big funding increases under the Obama administration, would see modest increases next year.
Ms. Mills said that cuts to microloan technical assistance would be offset by money from the Recovery Act, and that the jobs act provided $50 million to small-business development centers, which they could use to soften the blow in 2012. Still, she said, “this is what belt-tightening is about. Everybody across our 900 small-business development centers is going to do what we’re doing at headquarters and in the field, which is find out how to do more with less. That’s what taxpayers are expecting of us.”
But C. E. “Tee” Rowe, president and chief executive of the Association of Small Business Development Centers, said the centers have already used money from the jobs act to hire more advisers to do more counseling. Moreover, he contended, a cut in federal funding would lead to a cut in state funding. “The state government looks at it as a situation where they’re required to come up with less matching funds, so they will,” he said. “It’s a reduction in both sides.”
Connie Evans, president and chief executive of the Association for Enterprise Opportunity, a trade group for microlenders, criticized the cuts to programs serving the smallest, poorest businesses. “The initiative that the administration has announced recently seems to emphasize high-growth, high-tech businesses,” she said, “and it seems to not grasp the idea that innovation takes place in low-wealth communities as well. And these entrepreneurs need support. Businesses that receive support from microenterprise development organizations have a higher survival rate than the average business and create three to five jobs on average.”
On Capitol Hill, the Democratic leaders of the small-business committees expressed cautious support. “The president has, again, submitted a budget for the Small Business Administration that allows the agency to meet its mission, after years of being under-funded and unable to help small businesses,” Senator Mary Landrieu, Democrat of Louisiana, said in a statement. However, she also signaled she would fight the cut in funding for small-business development centers, which she described as a “lifeline that we must strengthen not weaken.” Representative Nydia Velázquez Democrat of New York, called the president’s S.B.A. proposals “a starting point.”
But Senator Olympia J. Snowe of Maine, the ranking Republican on the Senate small business committee, chastised the Obama administration for seeking more money “for salaries, operating costs, and the administrator’s Executive Direction budget” — which, she pointed out, has nearly tripled since 2008. “If the president can find areas for spending cuts within the programs that directly reach America’s entrepreneurs,” Ms. Snowe said through a spokeswoman, “he should be able to find areas for cuts within the agency’s overhead expenses.”
*Microlending should not be confused with the late and troubled America’s Recovery Capital loan program created by the stimulus, in which the S.B.A. fully guaranteed small bank loans to “struggling yet viable” businesses.
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