OF JOHN D. GRAHAM, PH.D.
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."
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 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
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.
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
Thank you very
much for the opportunity to appear today. I am willing to answer any
questions you may have.