For the sixth year running, the Small Business Administration is finding its budget cut and its staff whittled.

During the Bush presidency, the SBA has been trimmed by about 31 percent, from a $900 million budget in 2001 to $624 million for fiscal year 2007. Staffing has followed at the same rate of decrease.

Libertarian-leaning conservatives have been questioning the wisdom of government subsidies to small business since at least 1984, when the Heritage Foundation recommended shutting down the Small Business Administration and President Reagan proposed the phase out to his Cabinet.

In December, American Enterprise Institute economist Veronique du Rugy raised the call again with a report disputing the widely held idea that small business creates 75 percent of all new jobs. Du Rugy reasons that the SBA simply shifts resources from creditworthy companies to firms that probably won't survive.

UNDER FIRE

Lloyd Chapman thinks Congress will have to work pretty hard to save the SBA from extinction. The issue may even have to go to court.

"It's not a matter of whether the Bush Administration is going to close the SBA- they're closing it as we speak," says Chapman, founder of the SBA watchdog group, the American Small Business League (ASBL). Chapman's been watching the SBA-and even suing it-since 2002 in an attempt to stop large companies from getting money and contracts intended for small businesses.

He's been sparring with SBA Administrator Hector Barreto over what he believes are anti-business policies.

Chapman believes the Bush agenda-buttressed by think tanks like the American Enterprise Institute and Heritage Foundation-is to eliminate mandates that give government contracts to small businesses and minorities.

The debate comes at a time when a new Census Bureau report shows explosive growth for Hispanic-owned businesses, the majority of which are sole proprietorships.

The 2002 Survey of Business Owners, released March 21, shows a 31 percent increase in Hispanic business ownership since 1997, a rate triple the national average for all businesses.

One of the top challenges for those small businesses is the access to capital. And one of the budget cuts proposed by President Bush was the SBA micro loan program, which provides up to $35,000 in capital to those businesses that are just starting up. "I'm absolutely shocked that business groups claiming to be advocates for small business aren't doing anything about this," Chapman says.

FIGHTING BACK

Chad Moutray, chief economist for the SBA Office of Advocacy, stands by the idea that small business is the nation's top job generator.

He disputes the contention by Du Rugy and others that the SBA is wasting billions of dollars on short-lived small businesses.

"Large firms have actually been shrinking on net, where small businesses are gaining," Moutray says. "Between 60 and 80 percent of the net new jobs are at firms with less than 500 employees."

While the SBA defines a small business as having fewer than 500 employees, Moutray says the majority of new jobs are at firms with fewer than 20.

Small start-ups are typically at the forefront of technology, he says, noting that Apple Computer was once a solo business seeking an SBA loan. He and Du Rugy agree that "gazelles"-small startups that grow into large corporations-are critical to the economy.

That's why the U.S. Hispanic Chamber of Commerce defends the continued existence of the SBA. Ninety-eight percent of the chamber's members nationwide are companies with fewer than 10 employees.

"Big businesses aren't born big, they're born as small businesses," says Michael Barrera, president and CEO of the U.S. Hispanic Chamber of Commerce. "The SBA is a great agency."

Barrera says the SBA is backing more loans than ever despite the annual budget cuts. And while staffing has been trimmed, the SBA still maintains 78 district offices around the country. He credits the SBA's Barreto with giving the agency a customer-service orientation.

Besides being a former board member for the Hispanic chamber, Barreto founded his own employee benefits firms as well as a securities brokerage.

He has also been criticized recently for bungling disaster-related loans in the Gulf Coast; Rep. Nydia Velazquez (D-NY), the ranking member of the House Small Business Committee, even called for his resignation.

The chamber would like to see the SBA get a budget boost.

WASHINGTON -- Citing enormous backlogs and high rates of declined loans for hurricane victims, a House Democrat on Wednesday called on the head of the Small Business Administration to quit immediately.

Rep. Nydia Velazquez, the top Democrat on the House Small Business Committee, said a flood of missteps by the SBA this year make it clear that Hector Barreto isn't capable of leading the agency. Barreto, said the New York congresswoman, "has simply run SBA straight into the ground."

Velazquez said that since the hurricanes roared ashore in August and September, the agency has declined 80 percent of disaster loans related to Hurricane Katrina and Rita and has a backlog of more than 200,000 requests for relief. She said the agency also has cost small businesses more than $1.4 billion in contract opportunities by letting big companies win SBA contracts.

The Associated Press reported earlier this year that a substantial amount of nearly $5 billion in SBA terrorism recovery loans was given to companies that neither wanted nor knew they were receiving money earmarked for economic victims of the Sept. 11 attacks.

In a statement released late Wednesday, the agency said it has cleared more than 20,000 loans worth $1.4 billion to Gulf Coast homeowners, renters and businesses.

"Unfortunately, the current political environment in Washington, D.C., is not lacking for individuals who are anxious to throw stones," said Raul Cisneros, an agency spokesman. "This administration is focused on helping the people of the Gulf Coast rebuild after these devastating hurricanes."

Sen. John Kerry, the top Democrat on the Senate panel that oversees the agency, blasted the White House's response to the hurricanes earlier this week.

"The SBA has ignored Gulf Coast small businesses," he said. "Over the past three months, the SBA has failed to get loan dollars into the hands of small business. This administration is turning its back on Katrina's victims."

A White House spokeswoman, however, indicated the administration supports Barreto.

Small businesses aren't winning as many lucrative contracts designated for them as the federal government has reported, a study by Congress' investigative arm has found.

About 11 percent of the 50,000 companies receiving contracts set aside for small businesses in fiscal 2001 exceeded the "small" standard defined by the government, according to the General Accounting Office.

The 5,341 larger companies posted $13.8 billion from the small-business contracts while earning $60.6 billion from open contracts.

The findings released this week cast doubt on the government's report of giving 22 percent of the $50 billion pie to small businesses in fiscal 2001, said Dave Cooper, director for acquisition and sourcing management at the GAO.

It also raises questions about future reports, he said.

Most of the size discrepancies are caused by companies not using the standards set by the Small Business Administration (SBA), Mr. Cooper said.

Government contracts may last up to 20 years, and a business considered small at the beginning of a contract may outgrow the definition during the term.

Lawmakers said in a hearing yesterday that poor database systems and little enforcement of the contracting rules have caused much of the problem.

The SBA acknowledged at the hearing that its online database, Pro-Net, a directory of small businesses available for federal contracts, posts large businesses as well.

"But Pro-Net is meant to be a guide for contractors to search for small businesses in various industries," said Fred Armendariz, SBA associate deputy administrator for government contracting and business development.

Mr. Armendariz added that contracting officers are responsible for determining if a company is too large or is owned by a large corporation.

Size standards the SBA uses to classify small businesses have caused information discrepancies between agencies, resulting in small firms losing bids, said U.S. Rep. Donald Manzullo, Illinois Republican and chairman of the House Small Business Committee.

"There is something wrong with this size system when agencies can't determine how big is too big for a company," Mr. Manzullo said.

He said he plans to set one manufacturing standard at the end of June, during the committee's budget hearings for the agency.

"I will set an arbitrary size of 500 workers as the limit for small manufacturers, which is the industry that is plagued the most by this problem," he said.

Under SBA standards, a small business generally has fewer than 500 employees and $5 million or less in annual sales. But the definitions vary by industry.

U.S. Rep. Nydia M. Velazquez, New York Democrat and ranking member of the committee, said she would push for small businesses to recertify with the government annually. Small companies currently must recertify every five years.

Kenneth Robinson, a small-business owner in Leesburg, Va., said the size and database issues are only a small part of the problem.

"There is a greater concern that some bigger businesses are knowingly labeling themselves as small businesses," said Mr. Robinson, president and chief executive officer of Kenrob & Associates Inc., an information-technology company.

Lloyd Chapman, a small-business advocate who led calls for the GAO investigation, asked for stronger enforcement of the Small Business Act.

Federal agencies have been taking credit for awarding contracts to small businesses that have actually wound up with large companies, according to a General Accounting Office report released yesterday, casting doubt on the government's effort to boost awards to smaller firms.

The report said that 5,341 large companies were among the 49,366 firms identified in the Federal Procurement Data System as receiving small-business contracts in fiscal 2001. Five large firms, for instance, received $460 million in small-business contracts, the report said. The firms were not named.

The federal government fell short of its goal of awarding 23 percent of all contracts to small businesses in 2001.

" With the latest GAO findings, we will learn that the government didn't just miss the small-business mark, but it missed it by more than we had originally thought since the large business contracts were miscounted -- and misrepresented -- as small ones," Rep. Nydia M. Velazquez (D-N.Y.) told the House Committee on Small Business at a hearing held on the report. "Not only is it wrong and unfair that large businesses win small-business contracts, but it also inflates the federal government's track record for achieving its small-business goals."

The definition of a small business varies among sectors. A retail or service company with revenue of less than $5 million would qualify, as would a manufacturer with 500 employees or less.

In March 2002, the Bush administration unveiled a small-business agenda to increase the access of small business to federal contracting. The figures for the 2002 fiscal year will not be available until later this year.

So far in fiscal 2003, the Small Business Administration has received 193 protests alleging that a small-business contract went to a large company. In 68 of those cases the agency agreed that the company awarded the contract was not small. In fiscal 2002, the SBA received 383 protests on small-business contracts and in 85 of those cases it determined that the firm was not small, according to the agency, and the firm lost the contract.
"Misrepresentation of a firm's . . . size in small-business contracting is a widespread problem for the small-business community," said Lloyd Chapman, president of the Microcomputer Industry Suppliers Association, a trade group representing small information technology companies.
Companies found misrepresenting their status should be prosecuted, Chapman said. That will be "a major step in reduction of abuse in small-business contracting and will dramatically increase contracts for legitimate small businesses," he said.

Representatives of the Small Business Administration and General Services Administration acknowledged the problem and said they were attempting to address it. The SBA has proposed a rule that would require small businesses to certify their status annually, an agency official said. That would help agencies accurately track how many of their contracts go to a small business, they said.

The federal government does not have strong enough deterrents to fight small business contracting fraud, said two inspectors general before a House committee hearing.

The biggest problem is the government prosecutes based on the financial loss to the government. But in cases of preferential contracting programs, the fraud arises from who performed the work — not the work itself.

The inspectors general at the General Services Administration and the Small Business Administration propose the government prosecute small business contract fraud based on the contract amount instead.

"If you say in law, if you are a dishonest actor who should not have gotten this 8(a) contract and this is a $20 million contract, that is now a $20 million loss to the government because the government has lost the benefit of awarding that contract to somebody they were meaning to help," said SBA IG Peggy Gustafson before a Oct. 27 hearing of the House Committee on Small Business's Subcommittee on Investigations, Oversight and Regulations.

She added, "If that's the loss, then they're facing jail time, serious time. And that's what gets the prosecutors interested."

Under current guidelines, contractors convicted of small business-related fraud receive probation or at most a six month sentence, according to a 2008 white paper by the National Procurement Fraud Task Force. The IGs' recommendations were based on proposed legislative changes in the white paper.

The Small Business Act mandates 23 percent of all federal contract dollars go to small businesses. Agencies also have to meet specific goals for small disadvantaged businesses, women-owned businesses, HUBZone businesses and veteran-owned and service-disabled veteran-owned small businesses.

Last year, the federal government spent $535 billion on contracts for goods and services, according to the Government Accountability Office. In 2010, agencies awarded small businesses $98 billion in contracts, but fell short of the goal by 0.03 percent, and missed on every other category as well.

The small contracting process is "wrought with fraud," said GSA IG Brian Miller at the hearing.

Large companies can win small business contracts by using an eligible company as a "pass-through. An analysis by the American Small Business League found 60 of the top 100 small business contractors were actually large companies.

"It is unbelievable that rampant fraud and abuse in federal contracting has gone on for this long," said ASBL President Lloyd Chapman in a release. "The SBA needs to listen to their inspector general and end the diversion of federal small business contracts to large businesses immediately."

Contractors also falsify information to be eligible for small business contracts. With false information, Miller said it's difficult for IGs to identify fraud because often agencies rely on self-certification.

These dishonest contractors "know that they may not be detected, that the federal government may not be able to make the case against them easily and they may get away with it," Miller said.

Another challenge in oversight is the lack of clarity in who should make sure small business contractors are who they say they are.

"I think the government needs to engage in a very robust discussion of where that responsibility lies," Gustafson said.