The Bush Administration misrepresented data to meet contract allocation requirements, according to a report released by Democrats of the House Small Business Committee. The government is required to give at least 23% of its contracts to small business, but has failed the past six years. The Small Business Administration (SBA) claimed to have exceeded this threshold in 2005, but actually fell short because $12 billion it said was given to small businesses was in fact given to large ones.

Some of the miscategorized contracts went to some of the biggest companies in the world, including Microsoft, Rolls-Royce, Wal-Mart, Exxon Mobil, Google, and Lockheed Martin. Among others were large media companies like the Associated Press, The New York Times, USA Today, Bloomberg, and PBS.

What we are seeing is a sheer lack of accountability from the administration that is resulting in these large businesses receiving small business awards," said Rep. Nydia Velázquez, the committee's ranking Democrat. "As a consequence, entrepreneurs are getting less and less contracting opportunities each year."

According to Velázquez, miscoding first became a large concern in 2004, when $2 billion was incorrectly labeled. The number has ballooned since then to six times that amount. More than 2500 large compaines and ineligible entities counted as small businesses received contracts.

The findings come in contrast to claims by Bush that he is concerned about helping small businesses, which has been part of the Republican justification for cutting the estate tax. Two months ago, the watchdog group American Small Business League (ASBL) condemned Bush for gutting the SBA, which was intended to promote small businesses, by 31% since he took office. "It's not a matter of whether the Bush Administration is going to close the SBA- they're closing it as we speak," said ASBL founder Lloyd Chapman.

The federal government awarded a record high $79.6 billion in product and service contracts to small businesses in the 2005 fiscal year, according to a report from the U.S. Small Business Administration.

Those contracts represented 25.4 percent of federal prime contract spending for goods and services, which totaled $314 billion that year.

The American Small Business League in Petaluma criticized the report for significantly inflating the statistics. League President Lloyd Chapman has filed a series of lawsuits and freedom of information requests alleging that large companies are being categorized as small businesses and therefore improperly win federal contracts.

The league said General Dynamics and Northrop Grumman are among large corporations that show up on lists of small businesses.

While acknowledging some errors in coding, the SBA says that some companies outgrow the federal definition of a small business or are acquired by a large company after receiving contracts and are allowed to finish the contract period.

The government promised banks a hands-off approach in overseeing nearly $5 billion in Sept. 11 recovery aid to small businesses. What it got in return was numerous loans to companies that didn't need terror relief – or even know they were getting it, The Associated Press found.

"Had we known it was 9/11 money, we would not have borrowed it," said John Adams, a vice president of Brankle Brokerage and Leasing in Marion, Ind., who didn't know until informed by AP that his company's $1.33 million loan had been drawn by his bank from a program created by Congress to help economic victims of the 2001 terror attacks.

"We would have chosen some other avenue. That money surely could have been used by people who needed it more than we did," Adams said.

His company wasn't alone. From Dunkin' Donuts shops and florists to motorcycle dealers and chiropractors, businesses nationwide said they were unaware their banks had lent them money from the low-interest, government-guaranteed Sept. 11 loan program.

The records obtained under the Freedom of Information Act also show that many other loan recipients who made cases they were injured by Sept. 11 were far removed from the direct devastation of New York City and Washington, like a South Dakota country radio station, a Virgin Islands perfume shop and a Utah dog boutique.

The pattern of lending left many at New York's Ground Zero seething, especially those who had trouble getting government assistance.

"You have to take it back and give it to us. Even now, I could use it," fumed Mike Yagudayev, who said the government offered him only $20,000 of the $70,000 loan he requested to rebuild the hair salon flattened by the collapse of the World Trade Center's twin towers.

The Small Business Administration, which oversaw the two Sept. 11 loan programs, said it first learned of the problems through AP's review and was weighing whether an investigation was needed. But officials also acknowledged they intended to target the post-Sept. 11 aid broadly because of the enormous impact the attacks had on the U.S. economy.

"We started seeing business in areas you wouldn't think of – tourism, crop dusting, trade and transportation. ... So there were a lot of examples you wouldn't think of, at first blush," SBA Administrator Hector Barreto said.

SBA officials declined comment on documents showing one of their top officials promised banks back in 2002 that there would be a no-questions-asked approach to Sept. 11 relief loans.

"We want you to understand that we do not intend to play gotcha," Jane Butler, the agency's chief of financial assistance at the time, told a gathering of California lenders in June 2002.

Under one of the programs, SBA directly lent money to companies that provided detailed arguments on how they were hurt. The other provided incentives – and guaranteed loans from default – so banks could lend money to companies they determined were hurt by the post-Sept. 11 economic downturn.

Most loans were well below market rates – as low as 4 percent, documents show.

In all, the government provided, approved or guaranteed nearly $4.9 billion in loans, and took credit for saving 20,000 jobs. That would put the average cost of saving a job at about a quarter million dollars each.

SBA officials acknowledged they gave little oversight to the second program, called Supplementary Terrorism Activity Relief, leaving banks to determine who should get loans.

Banks were required to write justification for each company but did not have to submit it to the SBA even though Congress originally required that the loans go only to companies that could demonstrate they suffered direct or indirect harm from the terror attacks.

SBA documents obtained by AP show banks had a strong incentive to approve as many loans as possible from the terror program. The banks profited from the interest while the government guaranteed between 75 percent and 85 percent of each loan total, leaving banks with little risk.

And the annual fee the lenders paid to SBA to get the government guarantee on borrowed money was slashed from 0.5 percent to 0.25 percent, meaning lenders saved an additional $5,000 a year for every $2 million they lent under the STAR program.

While SBA officials expressed surprise at AP's findings, several banking officials said the agency encouraged the industry to use the post-Sept. 11 programs liberally, especially when its main guaranteed lending program was hit hard by budget cuts in 2002.

"They had personnel at our conference stand up and say if you cannot find a reason to move the loan over to the STAR program, contact us and we'll help you find a reason to move it over, because they had insufficient funding," recalled Tony Wilkinson, president of the National Association of Government Guaranteed Lenders.

Major lenders like Wachovia and Wells Fargo declined to say how many loans they shifted into the terror relief program, saying only that they followed the law.

Wells Fargo, the nation's second largest SBA lender, said the STAR program enabled lenders "to provide funds to new and mature businesses impacted by 9/11" and the company "continues to strictly adhere to SBA operational standards for all SBA loan originations."

Many loans went to local outlets of some of America's most famous and lucrative companies. For instance, more than 100 Dunkin' Donuts, Subway and Quiznos franchises across the country got loans. So did 14 Dairy Queens.

Gordie Barnes, who received a $1.49 million loan to buy the Williams Garden Center in New Bern, N.C., said the previous owners had mentioned that business was dropping off, but not necessarily because of the attacks.

"It would be a very big stretch of the imagination to figure out how this store would be impacted by those wackos who flew their planes into the Twin Towers," he said.

Leslie Bair used a $396,000 loan approved in January 2002 to purchase a recreational vehicle campground in Inglis, Fla. "I would hate to think that my money took money away from somebody else who needed it," she said.

Of the 19,000 loans approved by the two programs, fewer than 11 percent went to companies in New York City and Washington, an AP computer analysis showed.

Thousands of businesses far from the devastation simply submitted short applications that linked their slow business to the widespread economic fallout caused by Sept. 11, and got loans. For instance:

_Karl Grimmelmann, general manager of KBFS-AM "Hit Kickin' Country" in Belle Fourche, S.D., borrowed $135,000 from SBA's disaster program after learning about it from a news release. He said his station was forced to pay more money to cover national news and also lost advertisers.

_Margie Olson, co-owner of the Torii Mor Winery in McMinnville, Ore., said her business needed a $125,000 loan because it couldn't sell high-end pinot noir to restaurants that closed in New York City.

_Melva Kravitz, co-owner of the Little Dogs Resort & Salon in Salt Lake City that offers boarding and grooming services for small dogs, said people stopped taking vacations and boarding their pets after Sept. 11, requiring her $50,000 loan.

_Christine Hilty, co-owner of Violettes Boutique on St. Croix in the U.S. Virgin Islands, said the perfume shop lost 60 percent of its business overnight as tourism stopped, and she got a $169,500 loan from the SBA.

Though the loan programs have now ended, the government is inheriting a residual burden. Already, taxpayers have been forced to cover about 600 defaulted disaster loans – some approaching $1 million each – from companies that went bankrupt or closed. More defaults are expected.

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A coalition of minority business organizations is urging SBA to adopt tiered size standards that could allow many larger companies to become eligible for federal small business programs.

Members of the Minority Business Summit Committee presented the proposal in comments on SBA's proposed revision of size standards. Groups endorsing tiered standards include the National Minority Supplier Development Council, the Latin American Management Association and the Association for Small Businesses in Technology.

The Summit Committee proposed a five-tier standard, but its member organizations offered different ideas on how the tiers should be structured. They said the tiered approach would allow growing businesses to continue to qualify for set-aside contracts until they are big enough to compete with corporate giants.

Stephen Denlinger, CEO of the Latin American Management Association, pointed to the current $21 million size standard for firms in the IT services industry. "A small IT firm, with annual sales of $21 million, is still an astonishingly small company in the overall IT industry," he wrote. "Upon exceeding the size standard of $21 million, these extremely small firms are cast out to compete in the IT industry with companies that have sales that are anywhere from 10 times to 300 times their size."

The proposal by the Association for Small Businesses in Technology calls for five tiers, with the top tier based on 10% of the average revenue of the five largest corporations in an industry. If the largest corporations averaged $1 billion in revenue, a small business would be defined as one with up to $100 million in revenue. Under current rules, the largest revenue-based standard is $28.5 million for certain heavy construction categories.

SBA officials have said in the past that they do not intend to increase size standards across the board.

The Commerce Department's COMMITS NexGen government-wide acquisition contract, a small business set-aside, uses a form of tiered standards by grouping companies that are similar in size according to their NAICS codes. Companies then compete for contracts only with others of similar size.

Other commenters said the use of tiered standards could crowd out existing small businesses by making larger companies eligible for set-aside contracts. Lloyd Chapman, president of the American Small Business League, wrote that tiered standards would "further limit opportunities for small businesses."

SBA says the adoption of tiered standards would require congressional approval.

SBA has not yet counted the comments it received in response to its notice of proposed rulemaking, but they number well into the thousands.

The Small Business League generated about 6,000 e-mail messages urging that size standards be based on employment rather than receipts and that there should be no grandfather clause under the new size standards. "'Grandfathering' will allow large businesses to continue to tie up billions of dollars of small business contracts, to the detriment of legitimate small businesses," Chapman wrote.

But other commenters said a grandfather clause is needed to avoid a catastrophic impact on companies that might suddenly lose small-business status under new size standards.

"The single best reason for converting to an employee-based size standard is the fact that the number of employees in a company does not vary with changing economic conditions as radically as do receipts," wrote Michael D. Wheelock, president of Grayback Forestry Inc. in Merlin, OR.

Last year SBA proposed basing size standards on employment, with an additional revenue cap in most service industries, but the proposal was withdrawn in the face of widespread opposition. (SAA, 7/ 9/04) SBA issued a new request for comments in December.

In that notice, the agency said it is still committed to simplifying size standards because it believes the current patchwork of 37 standards, some counting employees and some counting receipts, is unnecessarily complicated.

But the Contract Services Association of America, among others, disagreed: "CSA believes that the current system is not complex or difficult to use and, therefore, should not be changed ... Change for the sake of change is not a reason for throwing small businesses into turmoil."

SBA plans several public meetings around the country to hear comments on the issue. Gary Jackson, assistant administrator for size standards, said the dates and places will be announced shortly.

Two other issues drew a large number of comments, apparently as a result of organized letter-writing campaigns:

SBA asked whether small companies should be eligible for Small Business Innovation Research contracts if they are majority-owned by a large venture capital firm.

What exactly is a small business anyway?

By U.S. government standards, a sheep farmer is one, so long as her business pulls in no more than $750,000 a year. So is a residential remodeler, though he can make up to $28.5 million. A fish and seafood wholesaler gets small status if the company employs fewer than 100 workers while a telecommunications reseller is allowed up to 1,500 employees and can have unlimited revenue.

Such wildly diverging criteria are at the heart of a heated debate among politicians, business owners and advocacy groups about whether existing standards should be modified to make them simpler and less varied. At stake are the billions of dollars in government loan money, contracts and technical assistance that are designated each year for businesses defined as "small."

Currently, size standards vary depending on the industry, and are based on employee count or average annual revenue. Some believe the status quo is fine, while others say the definition of "small" is too generous in certain cases, particularly with nonmanufacturers where the standard is typically 500 or fewer employees for small-business government contract awards.

"In America, 500 employees is not a small business in most industries," says Lloyd Chapman, president of the Petaluma, Calif.-based American Small Business League advocacy group. His group is pushing to have the standard dropped back to 100, where it was in the mid-1980s.

Last summer, the SBA proposed restructuring the size standards, but a backlash of criticism led it to withdraw its proposal. An estimated 34,000 small businesses would instantly have lost their status. The SBA says it remains committed to streamlining size standards and is seeking further public comment on the issue until Sunday. As the deadline approaches, here are some questions and answers:

Why do these standards matter?

Size standards determine whether a business is eligible to participate in SBA programs, including loans, disaster recovery and federal-contract set-asides. Each year, the federal government aims to direct 23% of its spending dollars to small businesses. In fiscal 2003, for example, that would have totaled more than $65 billion.

How do I know if I'm a small business?

The SBA's Web site has a 40-plus-page table of size standards listing requirements for all firm types, from barbershops and nail salons to wineries and computer resellers. For most manufacturers, the standard is 500 employees, though it can go as high as 1,500. In the retail and service industries, however, the benchmark is typically $6 million in revenue, though there are exceptions to that, too. There are 37 different standards.

Why so many?

"Small" is not necessarily the same from industry to industry, the SBA believes. A shipbuilder, for instance, likely needs more people to compete effectively than does a used-car dealer. Conventional wisdom has been that having a revenue-based standard is a more accurate measure of size in some industries.

So what does the SBA want to change?

Among other things, the SBA has proposed streamlining to 10 the number of different size standard levels and eliminating revenue-based size standards. Gary Jackson, the SBA's assistant administrator for size standards, says having so many divergent categories has contributed to problems in contract awards, including businesses qualifying as small for one award and not for another.

When changes were proposed last year, some 4,100 public comments were received. While the majority supported some aspect of the changes, others raised concerns that led to the proposal being withdrawn for more review. The restaurant industry, for one, argued that it would be unduly penalized because its members require a greater number of employees to generate revenue than others and thus need a revenue-based standard.

Members of Congress rebuked the proposed changes as well, partly under pressure from constituents who would have lost their small-business status.

Does this mean the proposal is dead?

No. Through Sunday, the agency is soliciting additional public input about various issues, including how it should define an employee for size standards, whether it should create standards solely for procurement programs, and if a revenue-based benchmark should be used at all. It has also asked whether a "grandfather" provision should be included to cushion businesses losing their status, although Mr. Jackson of the SBA says he hopes one won't be adopted. "If you're small, you're small. If you're not, you're not," he says. So far the agency has received 4,500 comments. The American Small Business League has filed 3,850 of those and is pushing for, among other things, no grandfathering or revenue-based standard.

If I want to know more, or voice an opinion, where do I go?