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FY 1977 Presidential Review - SBA
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FY 1977 Presidential Review - SBA
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James M. Cannon Files (Ford Administration)
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The original documents are located in Box 64, folder "FY 1977 Presidential Review - SBA"
of the James M. Cannon Files at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 64 of the James M. Cannon Files at the Gerald R. Ford Presidential Library
THE WHITE HOUSE
WASHINGTON
November 20, 1975
MEMORANDUM FOR:
JIM CANNON
FROM:
PAUL LEACH Peol
SUBJECT:
Budget Review For
Treasury, Commerce
and SBA
I assume that you will have had a chance to examine
the summary information in the budget book and con-
sequently I will limit myself to the issues.
TREASURY
1. Level of IRS Activities
This is a highly technical "management" issue
which I would let OMB and Treasury fight out
between themselves.
2. Level of U.S. Customs Service Activities
This too is a technical issue, but the arguments
seem to favor the OMB position, i.e., that
increased productivity can be achieved with no
major increase in resources.
COMMERCE
1. Ship Construction Program
I would recommend support for the OMB position,
i.e., lower funding. It appears that the
recovery in ship construction demand will be
more gradual and that the OMB funding level will
be sufficient.
2. NOAA Marine Programs
I defer on this to George Humphreys (I have supplied
him with the budget book materials).
-2-
3. NOAA Weather Programs
Again, I defer to George Humphreys.
4. Economic Development Administration
I would recommend approval of the OMB recommend-
ation, i.e., reductions in planning and research,
technical assistance and economic adjustment program
funding totalling $21 million below the EDA/Commerce
recommendation. While it is not certain that the
proposed reductions can be sold on the Hill, they
should be tried since the programs provide relatively
small substantive benefits.
SMALL BUSINESS ADMINISTRATION
1. Management Assistance and Portfolio Management
I would recommend support for the OMB position, which
provides for some increase in people and funding --
but does not provide all that SBA requests.
2. Lease and Surety Bond Guarantee Programs
I would recommend support for the SBA position on
this issue. In a time of budget tightness, the
lease and surety guarantee programs seem to be low
cost programs with political/symbolic value which
outweighs any benefit to be gained from a reduction
in budget levels.
SBA
1977 Presidential Review
Small Business Administration
Table of Contents
TAB A
Summary tabulation of the 1977 Budget
amounts requested and recommended.
TAB B
Summary of the principal budget decisions
reflected in the OMB recommendation.
TAB C
Issue Papers
Effect of issue on outlays
Issue
(dollars in millions)
1977
1978
1. Management Assistance
and Portfolio Management
- 5
- 5
2. Lease and Surety Bond
Guarantees
+ 2
+ 2
TAB A
Small Business Administration
1977 Budget
Summary Data
(In Millions)
Employment, end-of-year
Budget
Full-time
authority
Outlays
Permanent
Total
1975 actual
446
618
4,127
4,698
1976 February budget
289
339
4,171
4,457
enacted
417
468
XXX
XXX
supplementals recommended
-
-
XXX
XXX
agency request
645
476
4,741
5,356
OMB recommendation
417
468
4,339
4,792
OMB employment ceiling
XXX
XXX
4,171
4,786
TQ February budget
11
41
XXX
XXX
enacted
9
86
XXX
XXX
supplementals recommended
-
-
XXX
XXX
agency request
11
89
XXX
XXX
OMB recommendation
9
86
XXX
XXX
1977 July planning target
450
500
XXX
XXX
October planning target
450
545
XXX
XXX
agency's initial request
848
693
5,011
5,341
agency's reduced request
544
400
5,011
5,341
OMB recommendation
536
400
4,434
4,764
1978 OMB estimate
678
539
4,434
4,764
A-1
TAB B
1977 Budget
Small Business Administration
Summary and Background Information
Agency Request
SBA initially requested large increases in its direct loan programs (+$130 million), expansion of
its loan guarantee programs (+$805 million), and an additional 840 permanent positions (a 20% increase).
To reach its reduced outlay target of $400 million, SBA decreased its direct loan request by $165
million. This reduces the direct loan level to $375 million, which is $35 million less than in 1976.
OMB Recommendation
The OMB recommendations are driven primarily by the desire to provide the incentives and pressures
for SBA to put its programs on a more business-like basis. In particular, there is a need for SBA to
revise its entire approach toward loan and guarantee programs, to bring under control the loss rates
and costs on these programs.
The recommendations propose to accept SBA's reduced direct loan levels. OMB believes SBA has
reduced these programs to about the minimum level that has any chance of being accepted by Congress.
Also, these programs should be held down while SBA revises its loan approval procedures to limit the
loans to those firms for which there is reasonable assurance of repayment.
OMB disagrees with SBA's proposals for guarantee programs in three areas:
-- 7(a) guarantee: SBA requests an increase from the current budget level of $1.2 billion
to $2.0 billion. OMB recommends $1.5 billion to avoid a major expansion while this
program is under study to determine how to bring it under control;
-- Lease guarantee: OMB recommends suspending operation of this program until SBA is able
to manage it effectively on a full cost recovery basis; and
-- Surety bond guarantee: SBA proposed an increase of $445 million in this program. OMB
recommends reducing this program by $100 million from the 1976 level of $750 million to
help push SBA to establish tighter acceptance criteria and reduce loss rates.
B-1
OMB also recommends an increase of 95 permanent positions, including 85 to permit SBA to increase
its efforts to reduce losses on its loan portfolio.
Areas of Expected Disagreement With SBA
The Acting Administrator has made it clear that his highest priority is increased staffing and
funds for loan portfolio management and management assistance (Issue #1). He is likely to appeal the
proposed addition of only 85 positions (SBA requested an increase of 405 positions for these
activities).
SBA also may appeal the proposed suspension of the lease guarantee program and may object to hold-
ing down the surety bond program (Issue #2).
B-2
1977 Budget
Small Business Administration
Summary of Recommended Program Reductions
($ in millions)
1976
TO
1977
1978
FTP
Loan
FTP
0
Employ.
0
Level
0
Employ.
0
Employ.
Current base
468
4,339
86
410
423
4,434
562
4,434
Recommended level
468
4,339
86
375
400
4,434
539
4,434
Reduction
-
-
-
35
23
-
23
-
Program reductions:
Direct loans, reduce
-
-
-
35
23
-
23
-
Actions required:
Reduce the budget request.
Program impact:
The agency proposed to reduce its direct loan programs by a total of $35 million. This reflects
estimates of reduced demand for nonphysical disaster loans. It also makes reductions in the lower
priority regular 7(a) loan program (to $100 million from $113 million). These reductions will have
no serious impact on small businesses.
B-3
TAB C
Small Business Administration (SBA)
1977 Budget
Issue #1: Management Assistance and Portfolio Management
Statement of Issue
Are additional personnel needed to allow SBA to properly service and manage its loan portfolio?
Background
SBA has experienced a large growth in direct loan losses and in guarantee loan defaults in the
last several months. While part of this could be attributable to the recent downturn in the economy,
other major contributing factors are SBA's problems in making sound credit decisions in the loan
approval process, and its lack of staff to properly monitor and service non-delinquent loans and to
effectively process and liquidate delinquent loans. We will be working with SBA in the coming year to
improve the loan approval process and procedures so that loans are made only when there is a reasonable
chance of repayment.
Since 1968, the size of SBA's loan servicing portfolio has increased from 111,000 loans and $1.7
billion, to 240,000 loans with $6.8 billion in outstanding value. Despite this growth in the loan
portfolio, the number of personnel assigned to service and manage these outstanding loans has declined.
The effect has been to increase the loan servicing workload per employee to the point that SBA is unable
to properly monitor non-delinquent loan accounts and process or liquidate delinquent loan accounts.
In recognizing this problem, SBA initiated a pilot project in 1976 which combined available management
assistance and portfolio management personnel into 10 teams and provided emergency servicing to
approximately 3,000 delinquent loan accounts in 20 cities.
Alternatives
#1. Agency Request: Increase 1976 and 1977 employment levels by a total of 405 permanent
positions. Provide $3 million in 1976 and $7 million in 1977 to support these positions
and expand other management assistance programs.
#2. OMB Recommendation: Continue to improve the team approach during 1976 to manage and service
the loan portfolio. Provide an additional 85 positions and $2 million in 1977 to allow SBA
to improve its ability to handle the loan portfolio.
C-1
Analysis
Budget Authority/Outlays
July 1 -
($ in millions)
1975
1976
Sept. 30, 1976
1977
1978
1979
1980
1981
Agency Request
29
32
9
36
36
36
36
36
OMB Recommendation
29
29
7
31
31
31
31
31
Reduction From Agency Request
-3
-2
-5
-5
Agency Request: SBA requests an increase of 405 permanent positions to provide more in-depth, long-
term counseling to SBA delinquent and non-delinquent borrowers and to permit better management and
servicing of the direct and guaranteed loan portfolio. SBA feels strongly that failure to provide
it with the requested positions would result in a net dollar loss on SBA loans to small business and
an increased number of failures of these firms. The agency states that this is its highest priority
budget request.
OMB Recommendation: OMB recommends that SBA improve its coordination effort between management assist-
ance and portfolio management prior to supplementing these functions with additional positions. Not-
withstanding the desire to restrain Federal employment, the recommendation for an additional 85 positions
and $2 million in 1977 is considered to be necessary as an initial step to increase SBA's ability to
properly service and manage its loan portfolio.
C-2
Small Business Administration (SBA)
1977 Budget
Issue #2: Lease and Surety Bond Guarantee Programs
Statement of Issue
What actions should be taken to control the costs of the Lease Guarantee and Surety Bond
Guarantee programs?
Background
SBA's Lease Guarantee program assists small business persons to obtain leases of commercial and
industrial space in desirable business locations. In participation with insurance companies, SBA
guarantees the rental payment of a small business lessee. Although this program was legislated to
be self-sustaining, a recent GAO report stated that the program was not operating on a self-sustaining
basis and that SBA was not taking action to control the program. In 1975, about 100 businesses
received assistance under this program.
SBA's Surety Bond Guarantee program assists small contractors to obtain the surety bonds necessary
to permit them to bid on public and private procurement contracts. In participation with surety
bond companies, SBA guarantees 90 percent of all losses which might be incurred by the participating
surety company as a result of a small business default on a contract. A recent review of this
program indicates that it has a rapidly growing loss rate, and SBA has not introduced controls to
help reduce defaults. The program operated on a deficit basis of $3 million in 1974 and $14 million
in 1975. The deficit in 1977 is expected to exceed $20 million In 1975 the program guaranteed
11,600 bonds with a contract value of $760 million.
Alternatives
#1. Agency Request: Continue the lease guarantee program at the 1976 level. Expand the
Surety Bond Guarantee program from $750 million in 1976 to $1,195 million in 1977.
#2. OMB Recommendation: Suspend the Lease Guarantee program indefinitely. Reduce the Surety
Bond Guarantee program from $750 million in 1976 to $650 million in 1977.
C-3
Analysis
July 1 - Sept.
Guarantee Level/Outlays
1975
1976
30, 1976
1977
1978
($ in millions)
GL
0
GL
0
GL
0
GL
0
GL
0
Lease
Agency Req.
37
2
35
1
9
0
35
1
35
1
OMB Rec.
37
2
35
1
9
0
0
2
0
2
Surety
Agency Req.
760
14
750
14
240
6
1,195
20
1,195
20
OMB Rec.
760
14
750
14
187
6
650
21
600
21
Agency Request: SBA's request for the Lease Guarantee program is based on an expected continued low
demand for lease guarantees due to rising costs of leased spaced in choice locations. SBA proposes
no changes in the program to make it self-sustaining.
SBA's request for the Surety Bond Guarantee program is based on a perceived tightening of the private
surety industry which could preclude previously bondable small contractors from obtaining a surety
bond in the private sector. SBA believes that expansion of this program is desirable because it
would provide additional market opportunities for small businesses. The agency believes that the
cost to the Government of the program is not excessive in view of the benefits to small businesses.
OMB Recommendation: The OMB recommendation for the Lease Guarantee program would suspend the
program. The program has not provided for the type of lease guarantees originally contemplated by
Congress and requires major modifications to assure that it operates on a self-sustaining basis.
We believe that suspension of the program would not have a serious impact on small businesses.
It is recommended that this program be suspended indefinitely unless SBA can establish a management
system to make the program self-sustaining.
The OMB recommendation on the Surety Bond Guarantee program would require a $100 million reduction in
this program while SBA is working to correct the program deficiencies to reduce the defaults and costs.
It is expected that the recommended reduction in this program would provide an incentive for SBA to
establish the necessary controls on the program. Continuing the program at the $650 million level will
permit assistance to about 10,000 small firms, and emphasis can be given to assisting the socially and
economically disadvantaged.
C-4
These recommendations do not reduce outlays in 1977, but will prevent major increases in costs in
future years. These actions are part of a broader effort to put the SBA programs on a more business-
like basis. The Agency is expected to oppose the suspension and reduction of these programs.
C-5