WASHINGTON – A key Republican senator on Thursday accused the Bush administration's small business agency of illegally lobbying special interest groups to sway the outcome of a congressional inquiry into the agency's missteps.

Sen. Tom Coburn, R-Okla., chairman of a Senate Homeland Security subcommittee, said he found it unacceptable that Small Business Administration officials tried to stop lawmakers from holding a hearing examining the agency's problems and improving its performance.

"I have seen e-mails from SBA employees to organizations sent seemingly for the purpose of undermining our hearing before it even began. This type of illegal lobbying is unacceptable and will be dealt with accordingly," Coburn said in remarks prepared the hearing.

Federal law prohibits agencies from using tax dollars to lobby Congress, either directly or indirectly. Officials who violate the law can be fined as much as $100,000.

The SBA said it did not engage in illegal lobbying and that officials welcome the opportunity to inform lawmakers about their accomplishments.

SBA chief Hector Barreto said his agency had increased its loan guarantees to struggling small business from $14 billion to more than $19 billion in the last four years even as its budget shrank.

The agency also pointed to a Government Accountability Office report that found with a few exceptions, such as its slow response to last year's Gulf Coast hurricanes, the SBA is gradually improving some operations

Coburn was overseeing a hearing Thursday examining SBA's response to the hurricanes, its contracts that benefit big businesses and its awarding of Sept. 11 recovery loans to small firms that claimed they weren't hurt by the terrorist attacks.

He made clear he isn't satisfied with SBA's performance, urging the agency to stop cheerleading its successes and to look more closely at its problems.

"If SBA is broken, it's certainly not the small business sector that benefits from maintaining the status quo at the agency, but rather the bankers and big corporations who are currently profiting from SBA," Coburn said.

"Congressional hearings should not be pep rallies for business-as-usual. Small businesses deserve better," he said.

The agency acts as the lender of last resort for struggling companies among the nation's 24 million small businesses. It has come under withering bipartisan criticism on Capitol Hill for its recent missteps.

Coburn's hearing gave agency critics a forum to air their concerns,

"Honest business owners ... and hard-working taxpayers pay the price for SBA corruption and for its general ineffectiveness as an advocate for small business," Jonathan Bean, a Southern Illinois University professor who explored a series of SBA scandals in a 2001 book, said in prepared testimony.

Veronique de Rugy, an American Enterprise Institute scholar, advocated doing away with the agency, saying its loan programs "are simply a wasteful, politically motivated subsidy."

Lloyd Chapman, head of the Petaluma, Calif.-based American Small Business League, has criticized the agency for failing to prevent large companies from winning government contracts earmarked for small businesses. But he said he also is worried that programs which actually help small firms might be eliminated because of the political backlash.

WASHINGTON -- The Small Business Administration will investigate allegations by a Republican senator that agency employees illegally lobbied special interest groups to sway the outcome of a congressional inquiry.

Raul Cisneros, the agency's top spokesman, confirmed Thursday that SBA officials have asked their inspector general to see if laws were violated when employees essentially asked interest groups to pressure Sen. Tom Coburn, chairman of a Senate Homeland Security oversight panel. Federal law prohibits agencies from using tax dollars to lobby Congress, either directly or indirectly. Officials who violate the law can be fined as much as $100,000.

"I have seen e-mails from SBA employees to organizations sent seemingly for the purpose of undermining our hearing before it even began. This type of illegal lobbying is unacceptable and will be dealt with accordingly," said Coburn, R-Okla.

One e-mail reviewed by The Associated Press shows that an SBA employee forwarded an e-mail sent by an interest group to Oklahoma businesses, urging them to contact Coburn's office and express support for the beleaguered agency.

"From that hearing he might decide to move forward and draft legislation and try to gain support to abolish the SBA," the e-mail said. "It is disturbing that people are beginning to discuss these options and we would like to prevent these ideas from formulating into a legislative plan of action and future battle."

At the hearing, Coburn said he was confident that agency leaders didn't instigate an e-mail campaign designed to torpedo his inquiry. Still, he said he had questions about the agency's direction.

"If SBA is broken, it's certainly not the small business sector that benefits from maintaining the status quo at the agency, but rather the bankers and big corporations who are currently profiting from SBA," Coburn said. "Congressional hearings should not be pep rallies for business-as-usual. Small businesses deserve better."

The agency, which acts as the lender of last resort for the nation's 24 million small firms, has come under fire for its response to the Sept. 11 terrorist attacks and Gulf Coast hurricanes and its classification of multinational conglomerates as small businesses to meet federal contracting quotas.

SBA chief Hector Barreto defended his agency, saying it has increased loan guarantees to small business from $14 billion to more than $19 billion in the last four years even as its budget shrank. He also said the agency is making headway in lending money to hard-hit Gulf Coast businesses. Over the last six months, he said, the agency has approved more than $7 billion in loans to 100,000 businesses.

Some of the oversight panel's witnesses, however, weren't terribly impressed.

"Honest business owners ... and hard-working taxpayers pay the price for SBA corruption and for its general ineffectiveness as an advocate for small business," said Jonathan Bean, a Southern Illinois University professor who explored a series of SBA scandals in a 2001 book.

Veronique de Rugy, an American Enterprise Institute scholar, advocated doing away with the agency, saying its loan programs "are simply a wasteful, politically motivated subsidy."

While the hearing questioned the effectiveness of the SBA, a key Democrat weighed in on the agency's behalf. Massachusetts Sen. John Kerry, the top Democrat on a Senate panel that oversees small business issues, said the government should continue to invest in small companies.

As the deadline approaches for industry and agencies to submit comments regarding possible changes to the General Services Acquisition Regulation (GSAR), at least one small-business advocacy group is trying to rally firms to speak up.

Lloyd Chapman, president of the American Small Business League, said he believes that the General Services Administration and the Small Business Administration are not doing enough to stop small-business contracts from going to large firms. The GSA's possible rule changes could exacerbate what he sees as a pervasive problem.

"I'm very concerned that the GSA is going to do what they've always done, which is to implement policies that will allow federal agencies and prime contractors to report contracts to large companies as small business awards," Chapman said in a written statement. "I also foresee that the GSA will attempt to disallow any comments they receive that do not agree with their goal of diverting contracts to large businesses. My experience has been that the government manipulates this process in order to achieve its own ends."

GSA published Feb. 15 an advance notice of proposed rulemaking, outlining its desire to streamline GSAR but not offering specific proposals. That lack of information creates uncertainty for Chapman's group. Several federal probes have found evidence that large companies do get funds earmarked for small firms, but Chapman said he believes regulators are essentially winking at fraud.

Early in 2005, SBA officials released a 2004 report showing that $2 billion of the $50.8 billion earmarked for small businesses in fiscal 2002 did not get to them. The top 1,000 small businesses turned out to include 39 large companies and five other entities that were not small businesses. However, SBA officials and Eagle Eye Publishers, the group hired to conduct the survey, insisted there was no evidence of fraud in the findings. Instead, they said, the funds were misdirected because of circumstances such as small companies growing or being acquired while holding a small-business contract.

Chapman's group forced SBA to release an earlier draft of the report, which he said he believed would contain evidence of fraud expunged from the final version. While the draft listed vendor fraud as a possible cause– a phrase that did not appear in the final version– it did not provide any evidence. A SBA spokesman at the time said the report was intended to explore the extent of the problem rather than determine its causes, and that the phrase was removed to prevent speculation in the absence of evidence.

Before the SBA report, the Center for Public Integrity found that about 30 percent of the contracting money that supposedly went to small firms through Defense Department contracts during a six-year period ended in large companies' coffers.

None of the GSAR provisions GSA is considering address the systemic problems that allow the large companies to profit, Chapman said.

In its published notice, GSA asked for comments about which parts of GSAR:

• Should be clarified to be consistent with the Federal Acquisition Regulation.
• Should be eliminated because they either duplicate FAR or create inconsistencies.
• List inappropriate references.
• Have become irrelevant due to changes in technology or business processes.
• Create unnecessary administrative burdens for either contractors or agencies.
• Can be streamlined or simplified.
• Need to provide new or augmented coverage.
• Needlessly cost small entities money.

The future of the Small Business Administration will be up for discussion on Thursday at a Senate subcommittee hearing, but the debate has already begun.

Sen. Tom Coburn, R-Okla., chairman of the Senate Homeland Security and Governmental Affairs Subcommittee on Federal Financial Management, is holding the hearing.

Last Tuesday, before the event had even been officially announced, the American Small Business League sent out a news release headlined "Oklahoma senator calls for hearing to abolish small-business programs."

"I think that small-business owners in Oklahoma should be outraged that one of their senators is trying to bring an end to programs that are so vital to the state's economy," Lloyd Chapman, the group's president, said in the release. "If the government ends small-business contracting programs, then $119 billion in awards currently set aside for small firms will go to large firms, which make up only 2 percent of U.S. employers."

But two days later, in a news release of his own, Mr. Coburn called the ASBL notice a "false and deliberate distortion."

He said the goal of the hearing is simply to see if the Small Business Administration can be run more effectively.

"I've never met a small-business owner who believes any aspect of the federal government is operating at peak efficiency and should be immune from examination," Mr. Coburn said.

"I believe the Senate has a responsibility to ensure that the government is operating efficiently so our economy can sustain a costly war on terror, hurricane recovery effort and expanding Medicare, Medicaid and Social Security programs."

Among the ASBL's complaints: Veronique de Rugy, an economist with the conservative American Enterprise Institute, has been invited to speak at the hearings.

Ms. de Rugy recommends that the SBA be dismantled, arguing that small companies – a nebulous category to begin with – don't deserve any more protection than medium or large firms.

But if it's possible to bristle in a news release, Mr. Coburn did so when responding to Mr. Chapman's statement that the hearing is a step toward closing down the SBA.

"Small-business owners across America should be embarrassed by the ASBL's scare tactics," Mr. Coburn said.

Facing a growing backlog of disaster loan applications in the Gulf Coast, the Small Business Administration is toning down its annual celebration of small business this year.

Like years past, SBA Expo '06 is set to recognize the nation's estimated 25 million small business owners with gala events, ceremonies, and awards -- only this time without the actual business expo.

The event, part of National Small Business Week, will not include the usual matchmaking sessions, business seminars, and town-hall meetings on issues effecting entrepreneurs. In addition, most of the awards ceremonies, usually held at night, are being replaced by breakfasts and luncheons, according to SBA spokesman Dennis Byrne.

President Bush, who spoke at the annual event in 2005 and has spotlighted small businesses in his State of the Union address and other speeches, is not yet confirmed.

"In the wake of Katrina and all the work we're engaged in this year, we've decided to scale it back a little," Byrne said, adding the decision was "not a budget issue."

Critics have attacked the Bush administration in recent weeks for proposing what they claim are sweeping cuts to the agency's operating budget for 2007.

Earlier this month, a report by Democrats on the House Small Business Committee said the proposed $624 million budget would force cuts of up to 80% to some 40 small business programs currently offered by the agency.

On March 16, the Senate passed a bipartisan amendment by Sen. John Kerry (D-Mass.), the ranking Democrat on the Senate Committee on Small Business and Entrepreneurship, adding an extra $130 million to SBA funding for disaster loans, venture capital programs, and veterans business development, among other initiatives.

Lloyd Chapman, a vocal SBA critic and head of the American Small Business League, a policy watchdog group based in Petaluma, Calif., said he believes the shrinking budget -- along with scaled-back events like Expo '06 -- reflect a broader attitude.

"Republicans want to get out of small-business funding altogether," Chapman said. "They've cut the budget and staff in half, and now they're blaming it for not operating properly" he said.

Apart from budget issues, the agency has also been heavily criticized for its handling of emergency disaster loans for small business in the wake of Hurricane Katrina.

As of March 13, the agency had approved 86,200 loans out of a total of 276,400 applications filed since the storm hit the Gulf Coast region on Aug. 29, SBA figures show. Of these, 16,100 loans worth some $1.4 billion have been approved for local businesses, according to the agency.