WASHINGTON - A Senate subcommittee that has been examining the effectiveness of government agencies will take a close look this week at the embattled Small Business Administration.
The subcommittee will hear testimony Thursday from proponents and critics of the SBA, including a witness who will call on Congress to eliminate the 53-year-old agency, which has been harshly criticized for its response to Hurricane Katrina.
Sen. Tom Coburn, an Oklahoma Republican, leads the Homeland Security and Governmental Affairs Subcommittee on Federal Financial Management, Government Information, and International Security.
Capitol Hill lawmakers are looking for ways to trim spending in the face of widening budget deficits, and so far Sen. Coburn's committee has held 29 hearings on the effectiveness of agencies and programs throughout the federal government.
Still, that the SBA is under review at all has at least one small-business group nervous.
In a news release last week, the American Small Business League said the Senate hearing "indicates that rumors about government plans to close the SBA may be true."
Conservatives have generally taken a dim view of the SBA's lending programs, and some SBA advocates say they think President Bush would abolish the agency if he had enough political support. It is well known in Washington that the Reagan administration tried to do so in the 1980s.
But Sen. Coburn insisted that the hearing is about government efficiency, not the possible elimination of the SBA. In a news release Thursday he said the small-business owners should be "embarrassed" by the trade group's "scare tactics."
"It is absurd to suggest that I have a hidden agenda to harm small business," said Sen. Coburn, a physician in a practice that he said would be classified as a small business." Later he added, "I believe the Senate has a responsibility to ensure that the government is operating efficiently so our economy can sustain the costly war on terror, hurricane recovery effort, and expanding Medicare, Medicaid, and Social Security programs."
The SBA, for its part, says it does not view the hearing as a threat to its existence. Its administrator, Hector V. Barreto, is scheduled to testify.
"Our understanding has always been that this hearing is about the financial management of the SBA, particularly the capital access programs, and that is what we are prepared to testify about," a spokesman said Friday in an e-mailed statement.
Though the hearing itself may not focus on the elimination of the SBA, the testimony of at least one witness will.
Veronique de Rugy, a research fellow at the American Enterprise Institute, a conservative think tank in Washington, plans to tell lawmakers during her testimony that the SBA "should be cut from an overloaded budget."
"It's serving no purpose and it's wasting our money," Ms. de Rugy said. "It needs to go."
Ms. de Rugy slammed the SBA's flagship 7(a) loan program, which backs loans to small businesses with a government guarantee, saying that it causes SBA lenders to loosen their underwriting standards, which leads to higher defaults.
Of the $126 billion of loans it has guaranteed since 1992, the SBA has charged off about $7.3 billion, or about 5.7%, according to a recent SBA report. The default rate on its direct loans, which it makes to businesses and homeowners affected by disasters, is above 10%.
Ms. de Rugy said the tax dollars used to bail out bad SBA loans are an inappropriate use of public funds.
Moreover, she criticized the SBA for gauging its effectiveness by the amount of financial support it provides, rather than by the performances of the loans themselves. The SBA said that in fiscal 2005 it guaranteed or made $19 billion of loans to small businesses, the most in any year in its history.
Another SBA critic scheduled to testify before the subcommittee is Jonathan Bean, a professor of American history at Southern Illinois University Carbondale, and the author of "Big Government and Affirmative Action: The Scandalous History of the Small Business Administration."
Like Ms. de Rugy, Mr. Bean pointed out that SBA-backed loans make up a small fraction of business lending and said that businesses would still have access to capital without the SBA guarantee. In fact, he said that the SBA has more support from banks and members of Congress than from the business community.
Additionally, SBA disaster loans have gone to "questionable" projects, Mr. Bean said. After the 9/11 terrorist attacks, the loans were provided to firms far removed from the World Trade Center, including fishermen in Alaska and wedding photographers in Cape Cod, Mr. Bean said.
Still, he said he does not expect the SBA to be abolished anytime soon. "If Ronald Reagan couldn't do it, it's unlikely that this Congress will," he said.
Paul Merski, the chief economist at the Independent Community Bankers of America, said the criticism from Mr. Bean and Ms. de Rugy misses the point. He agreed there is plenty of capital available but said that many small businesses are start-ups with no track records, and that banks would not lend to them without the security of the SBA guarantee.
"The whole purpose of the SBA guarantee is to get more capital to businesses that are on the margins and would not qualify for commercial loans," Mr. Merski said.
He added that most conventional commercial loans must be repaid within five years, but that the SBA guarantee lets banks extend repayment terms for 10, 15, even 30 years, which keeps monthly payments low.
"For a small company that is just starting out, cash flow matters," he said.
