STATEMENT
OF JOHN D. GRAHAM, PH.D.
ADMINISTRATOR
OFFICE OF INFORMATION AND REGULATORY AFFAIRS
OFFICE OF MANAGEMENT AND BUDGET
EXECUTIVE OFFICE OF THE PRESIDENT OF THE UNITED STATES
BEFORE THE COMMITTEE ON SMALL BUSINESS
UNITED STATES HOUSE OF REPRESENTATIVES
February
27, 2002
Mr. Chairman,
and Members of this Committee, thank you for inviting me to this
hearing. I am John D. Graham, Ph.D., Administrator, Office of Information
and Regulatory Affairs, Office of Management and Budget. I am pleased
to have this opportunity to explain OMBs position on the role
of business size definitions in defining the scope of SBA loan programs.
I will also elaborate on one of OMBs concerns that was expressed
in a February 11th return letter from OMB to SBA.
In that letter, which I have submitted for the hearing record and
which is available on OMBs web site, OMB has returned for
reconsideration SBAs draft interim final rule entitled "Small
Business Size Standards; Economic Injury Disaster Loan Program."
Under Executive
Order 12866, which was adopted during the previous Administration,
OMB reviews all significant regulatory actions to ensure consistency
with the principle of good regulatory analysis and policy. At both
the proposed and final stages of a major rulemaking, OMB is provided
up to 90 days to review an agency's rulemaking package, including
the draft rule, the cost-benefit analysis, and any other supporting
materials. During the 90-day review period, professional analysts
at OMB scrutinize the agency's work and often work with an agency
to improve the analysis and/or the draft rule. There are ultimately
three possible outcomes of OMB review: (1) clearance for publication
in the Federal Register; (2) withdrawal by the agency
for further consideration; or (3) return by OMB to the agency
for reconsideration.
When a rule
is returned to the agency, it is the practice of this Administration
to prepare a formal return letter that is made available to the
public as well as the agency. Since I was confirmed by the Senate
in July of last year, I have signed 17 return letters about various
draft regulations. In most cases, the reason for the return was
an inadequate regulatory analysis. The public can review these letters
on our website at http://www.whitehouse.gov/omb/inforeg/return_letter.html.
In five of those cases to date, the agency ultimately improved the
regulatory package to the point that it was resubmitted to OMB and
cleared for publication in the Federal Register.
OMB is acutely
aware of the devastating impact that the events of September 11th
have had on the business community, including large, medium sized
and small businesses. We support the special commitment that Congress
has made to assist small businesses through the Economic Injury
Disaster Loan (EIDL) program. Since September 11th,
we have worked with SBA to (1) extend the coverage of this
program to small businesses outside of the immediately affected
geographical areas and (2) to accelerate a long overdue modernization
of the SBA definitions of "small business" that account for inflation
since 1994. These expansions have resulted in a $209 million obligation
for the EIDL program-nearly 2000 loans for small businesses. We
are also open to considering additional ways that SBA could cushion
the economic impacts of September 11th and protect
the viability of small businesses.
We returned
to SBA for reconsideration a recent proposal to expand the definition
of a small business (under the EIDL program) to any firm with less
than 500 employees or less than the industry specific definitions
of a small business currently used by SBA. This well intentioned
proposal would, SBA estimates, make an additional 200,000 businesses
throughout the country potentially eligible for the economic injury
loans available through the EIDL program. The fiscal impact of this
particular expansion would, we understand, be limited to this fiscal
year.
Our central
concern is that SBA has proposed, in the context of this draft rule,
a rather fundamental shift in the definition of a small business
-- a shift whose implications have not been adequately explored.
Currently, SBA defines "small business" on an industry by industry
basis. For non manufacturing industries, the default definition
is annual receipts of $5 million or less (recently updated
to $6 million or less). For manufacturing industries, the default
definition is 500 employees or less. For some industries, SBA has
-- through detailed rulemakings -- replaced the default definitions
with more tailored definitions judged appropriate for that particular
industry (e.g., petroleum exploration). In other words, a "small
business" is defined using a relative construct within an industry
rather than an absolute standard across the economy.
The proposal
that we returned to SBA did not contain a well considered rationale
for such a fundamental change in the approach to the definition
of a small business. Obviously, OMB is concerned that a change in
the size standards made for this program could readily be argued
as a precedent for changing the size definitions governing other
SBA subsidy programs.
If the change
to the 500 employee standard were made across SBAs programs,
the consequences might be quite controversial. For example, for
any fixed amount of SBA funding, the proposed change would cause
a shift in the mix of support from the manufacturing sector to the
non manufacturing sector, where many more service oriented firms
would be considered "small". It does not seem plausible to suggest
that service oriented firms with several hundred employees are "small"
in the sense that Congress and SBA have previously intended in the
design of SBAs assistance programs. Manufacturing firms with
several hundred employees are often very small when judged in the
context of their industry and the capital requirements necessary
to start a business in manufacturing. In short, OMB is not convinced
that the principle underlying the new size definitions would contribute
to sound economic policy. Instead, it would expand assistance to
non manufacturing sectors without any change in the amount of assistance
provided to manufacturing sectors, even though both are affected
by the events of September 11th and the recession.
Although OMB
has returned SBAs particular proposal for reconsideration,
we remain open to alternative proposals from SBA that can address
the financially ruinous impacts of the events of September 11th.
We have encouraged SBA to formulate proposals that maintain the
current industry specific approaches to defining small businesses.
Chairman Manzullo,
you called me several weeks ago and requested an expedited review
of this matter. As a result of your interest and concern, we did
perform a prompt review, far less than the 90 days permitted
under the executive order.
Thank you
very much for the opportunity to appear today. I am willing to answer
any questions you may have.
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