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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 OMB’s position on the role of business size definitions in defining the scope of SBA loan programs. I will also elaborate on one of OMB’s 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 OMB’s web site, OMB has returned for reconsideration SBA’s 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 /omb/inforeg/. 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 SBA’s 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 SBA’s 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 SBA’s 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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