VerizonCommunications is the largest wireless provider in the United States, with178,000 employees and $91.7 billion in sales last year, and yet it somehowmanaged to wrangle more than $107 million in federal "small-businesscontracts" last year through the US Small Business Administration.

Verizon isn't the only gargantuan company the SBA deemseligible for assistance. In 2015, according to a recent lawsuit by an advocacygroup for actual small businesses, the SBA counted contracts with 150 otherFortune 500 companies in its fulfillment of the federal government'ssmall-business contracting obligations.

"The Small Business Administration hasbecome perverted," says Lloyd Chapman, founder of the American SmallBusiness League, which filed the suit in May. "At some point their missionchanged to helping the government and contractors circumvent the Small BusinessAct."

Congress created the SBA in 1953 with itspassage of the Small Business Act, legislation designed to "maintain andstrengthen the overall economy" by giving the small fry of the businessworld a leg up. The definition of "small" varies by industry, from amaximum of 100 to 1,500 employees and revenues of $750,000 to $38.5 million.(Chapman, noting that the average American business has just 17 employees, saysthese caps are too high.) In any case, federal research shows that suchbusinesses are key to supporting the middle class: Although they employ less than half of allprivate sector workers, they create 64 percent of net new jobs.They also tend to buck the offshoring trendand are seen as a counterbalance to income inequalitybecause they spread wealth around to millions of entrepreneurs. "The SmallBusiness Act is the largest economic stimulus program for the middle class inUS history," Chapman proclaims. "And we are its protectors."

Indeed,his and other watchdog groups have repeatedly accused the SBA of failing tofulfill its original mission. Under the law, the agency is required to ensurethat at least 23 percent of federal contract money goes to small businesses.The actual figure, Chapman calculates, is about 4 percent, a difference ofhundreds of billions of dollars each year.

"TheUnited States government is anti-small-business," says Chapman, whosescrappy three-person outfit in Petaluma, California, has filed dozens oflawsuits against the SBA and other federal agencies over the past quarter-century,often compelling the agency to reveal more information about how it handlescontracts. The latest suit seeks an injunction that would require the SBA tostop allegedly cooking its books when it reports on federal contracting.

SBA spokeswoman Tiffani Clements would not comment directlyon the lawsuit, but argued in an email that actual misreporting ofsmall-business contracts is rare, and not the fault of SBA employees. Corporatebehemoths that acquire smaller firms may simply ignore a requirement to recertifythe size of the firms they acquire (the Verizon contracts were awarded to asubsidiary, Terremark Federal Group, that Verizon purchased in 2011).Additionally, Clements said, "There is always the possibility of humanerror" when the government's contracting officers record a company's data.(Chapman counters that if human errors were to blame, then the small firmswould get misclassified as large ones, too—and nobody in his group has everseen that happen.)

Chapmanis hardly alone in his criticisms. Every year since 2005, the SBA's Office ofthe Inspector General has ranked "small business contracting" as theagency's most serious management challenge. "As an advocate for smallbusiness, SBA should strive to ensure that only eligible small firms obtain andperform small business awards," the OIG wrote in an October report citing"widespread misreporting…since many contract awards that were reported ashaving gone to small firms have actually been substantially performed by largercompanies." The report blamed reporting errors mainly on contractingofficers and poor oversight of how companies calculate their size.

Perhaps the most significant way the SBA fudges thesmall-business contracting numbers is as follows: In arriving at its 23 percentfigure, the agency does not include any contracts for work performed outsidethe United States or in service of dozens of different federal agencies,including the Postal Service, the federal courts, the National Security Agency,and the CIA. It also excludes a large amount of contract spending related toMedicare, Medicaid, and veterans' health. Finally, it doesn't count contractscommissioned by state and local agencies using federal grant money.

The SBA argues that these exclusions are legal because thesmall business requirements apply only to "contracts" (not grants) at"federal agencies"—which the SBA defines as excluding"non-executive branch federal government entities" such as the courtsystem. It also excludes contracts that don't appear in the Federal ProcurementData System and those that may be deemed sensitive for "national securityreasons."  

In fact, the SBA's exclusions cover the majority of federaldiscretionary spending, according to an analysis by law professor CharlesTiefer, an expert on government contracts at the University of Baltimore.Tiefer calculates that, in 2011, the SBA excluded $677 billion worth of federalgrants and contracts from $1.1 trillion in overall spending, which allowed theagency to claim that 22 percent of the contracting dollars went to smallbusinesses that year.

"TheSBA has a lot of trouble getting agencies like the Department of Defense togive awards to small businesses instead of the Lockheeds and theHalliburtons," Tiefer explains, "so it wants formulas that establishthe lowest possible total to lighten up its work for how much small-businesscontracting it has to round up."

Although genuflecting to the shrine of small business hasbecome standard practice for politicians—President Barack Obama said in 2012that  small businesses "are the backbone of our economy and thecornerstones of our nation's promise"—the SBA's flaws are largely ignoredby the leaders of both parties. The watchdog group Public Citizen, which examined the issue last year,blames the inaction on the revolving door between government and major contractors,and on prodigious lobbying and political donations from Fortune 500 companies.

More surprisingly, the issue has received scant attentionfrom the nation's best-known "small business" groups. The NationalFederation of Independent Business, which claims 325,000 members and chaptersin 50 states, hasn't touched it. Chapman believes the NFIB is actually a shill operation for largecorporations. In 2011, it received a $3.7 million donation from KarlRove's Crossroads GPS, the dark-money arm of his conservative politicalfundraising juggernaut. 

In Tiefer's view, the outrage of Chapman's group is spoton. Redirecting hundreds of billions of dollars to small businesses each yearwould do a lot to address income inequality, he told me: "The differenceis much smaller between the salaries of the people at the top of a smallbusiness and the worker bees…By and large, the people at the top of the bigcontractors like Lockheed are in the 1 percent, whereas the people in the topof small businesses are not."

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