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Monday, December 31, 2012

SBA Surety Bond Guarantee Program



Robert Jay Dilger
Senior Specialist in American National Government

The Small Business Administration’s (SBA’s) Surety Bond Guarantee Program is designed to increase small businesses’ access to federal, state, and local government contracting, as well as private-sector contracts, by guaranteeing bid, performance, and payment bonds for individual contracts of $2 million or less for small businesses that cannot obtain surety bonds through regular commercial channels. The SBA’s guarantee ranges from 70% to 90% of the surety’s loss if a default occurs. In FY2012, the SBA guaranteed 9,503 bid and final surety bonds with a total contract value of about $3.9 billion.

A surety bond is a three-party instrument between a surety (who agrees to be responsible for the debt or obligation of another), a contractor, and a project owner. The agreement binds the contractor to comply with the contract’s terms and conditions. If the contractor is unable to successfully perform the contract, the surety assumes the contractor’s responsibilities and ensures that the project is completed. Surety bonds are viewed as a means to encourage project owners to contract with small businesses that may not have the credit history or prior experience of larger businesses and are considered to be at greater risk of failing to comply with the contract’s terms and conditions.

P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA), temporarily increased, from February 17, 2009, through September 30, 2010, the program’s bond limit to $5 million, and up to $10 million if a federal contracting officer certifies in writing that a guarantee over $5 million is necessary. The Obama Administration has recommended that the bond limit be increased to $5 million, most recently as part of its request for supplemental assistance for damages caused by Hurricane Sandy.

During the 112
th Congress, several bills were introduced to increase the program’s bond limit, including S. 1334, the Expanding Opportunities for Main Street Act of 2011, and its companion bill in the House, H.R. 2424. They would reinstate and make permanent ARRA’s higher limits. Also, H.R. 4310, the National Defense Authorization Act for Fiscal Year 2013, passed by the House on May 18, 2012, would increase the program’s bond limit to $6.5 million, and up to $10 million if a federal contracting officer certifies that such a guarantee is necessary. Also, on December 12, 2012, the Senate Committee on Appropriations released its draft of the Hurricane Sandy Emergency Assistance Supplemental bill. It includes a provision to increase the program’s bond limit to $5 million.

Advocates of raising the program’s bond limit argue that doing so would increase contracting opportunities for small businesses and bring the limit more in line with limits of other small business programs, such as the 8(a) Minority Small Business and Capital Ownership Development Program and the Historically Underutilized Business Zone (HUBZone) Program. Opponents argue that raising the limit could lead to higher amounts being guaranteed by the SBA and, as a result, an increase in the risk of program losses.

This report examines the program’s origin and development, including the decision to supplement the original Prior Approval Program with the Preferred Surety Bond Guarantee Program that provides a lower guarantee rate (70%) than the Prior Approval Program (80% or 90%) in exchange for allowing preferred sureties to issue SBA-guaranteed surety bonds without the SBA’s prior approval. It also examines the program’s eligibility standards and requirements, provides performance statistics, and concludes with a discussion of proposals to increase the 
program’s $2 million bond limit and to merge the Prior Approval Program and the Preferred Surety Bond Guarantee Program while retaining the Preferred Program’s more flexible operating Requirements.


Date of Report: December 14, 2012
Number of Pages: 32
Order Number: R42037
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Friday, December 28, 2012

SBA Small Business Investment Company Program



Robert Jay Dilger
Senior Specialist in American National Government

The Small Business Administration’s (SBA’s) Small Business Investment Company (SBIC) Program is designed to enhance small business access to venture capital by stimulating and supplementing “the flow of private equity capital and long term loan funds which small business concerns need for the sound financing of their business operations and for their growth, expansion, and modernization, and which are not available in adequate supply.” Facilitating the flow of capital to small businesses to stimulate the national economy was, and remains, the SBIC program’s primary objective.

At the end of FY2012, there were 301 privately owned and managed SBICs licensed by the SBA, providing financing to small businesses with private capital the SBIC has raised (called regulatory capital) and funds the SBIC borrows at favorable rates (called leverage) because the SBA guarantees the debenture (loan obligation). SBICs pursue investments in a broad range of industries, geographic areas, and stages of investment. Some SBICs specialize in a particular field or industry, while others invest more generally. Most SBICs concentrate on a particular stage of investment (i.e., startup, expansion, or turnaround) and geographic area.

The SBA is authorized to provide up to $3 billion in leverage to SBICs annually. The SBIC program has invested or committed about $18.2 billion in small businesses, with the SBA’s share of capital at risk about $8.8 billion. In FY2012, the SBA committed to guarantee $1.9 billion in SBIC small business investments, and SBICs provided another $1.3 billion in investments from private capital, for a total of more than $3.2 billion in financing for 1,094 small businesses.

Some Members of Congress, the Obama Administration, and small business advocates argue that the program should be expanded as a means to stimulate economic activity, create jobs, and assist in the national economic recovery. For example, S. 3442, the SUCCESS Act of 2012, and S. 3572, the Restoring Tax and Regulatory Certainty to Small Businesses Act of 2012, would, among other provisions, increase the program’s authorization amount to $4 billion from $3 billion, increase the program’s family of funds limit (the amount of outstanding leverage allowed for two or more SBIC licenses under common control) to $350 million from $225 million, and annually adjust the maximum outstanding leverage amount available to both individual SBICs and SBICs under common control to account for inflation. Also, H.R. 6504, the Small Business Investment Company Modernization Act of 2012, would increase the program’s family of funds limit (the amount of outstanding leverage allowed for two or more SBIC licenses under common control) to $350 million from $225 million.

Others worry that an expanded SBIC program could result in loses and increase the federal deficit. In their view, the best means to assist small business, promote economic growth, and create jobs is to reduce business taxes and exercise federal fiscal restraint.

Some Members have also proposed that the program target additional assistance to startup and early stage small businesses, which are generally viewed as relatively risky investments but also as having a relatively high potential for job creation. In an effort to target additional assistance to newer businesses, the SBA has established, as part of the Obama Administration’s Startup America Initiative, a $1 billion early stage debenture SBIC initiative (up to $150 million in leverage in FY2012, and up to $200 million in leverage per fiscal year thereafter until the limit is reached). Early stage debenture SBICs are required to invest at least 50% of their investments in

early stage small businesses, defined as small businesses that have never achieved positive cash flow from operations in any fiscal year.

This report describes the SBIC program’s structure and operations, including two recent SBA initiatives, one targeting early stage small businesses and one targeting underserved markets. It also examines several legislative proposals to increase the leverage available to SBICs and to increase the SBIC program’s authorization amount to $4 billion.


Date of Report: December 11, 2012
Number of Pages: 41
Order Number: R41456
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Small Business Administration HUBZone Program



Robert Jay Dilger
Senior Specialist in American National Government

The Small Business Administration (SBA) administers several programs to support small businesses, including the Historically Underutilized Business Zone Empowerment Contracting (HUBZone) program. The HUBZone program is a small business federal contracting assistance program “whose primary objective is job creation and increasing capital investment in distressed communities.” It provides participating small businesses located in areas with low income, high poverty rates, or high unemployment rates with contracting opportunities in the form of “setasides,” sole-source awards, and price-evaluation preferences. Firms must be certified by the SBA to participate in the HUBZone program. On December 4, 2012, there were 5,667 certified HUBZone small businesses.

In FY2011, the federal government awarded 91,864 contracts valued at $9.9 billion to HUBZonecertified businesses, with about $2.75 billion of that amount awarded through a HUBZone setaside, sole source, or price-evaluation preference award. The program’s FY2011 administrative cost was about $15.6 million. Its FY2013 appropriation is just over $2.5 million, with the additional cost of administering the program provided by the SBA’s appropriation for general administrative expenses.

Congressional interest in the HUBZone program has increased in recent years, primarily due to reports of fraud in the program. Some Members have called for the program’s termination. Others have recommended that the SBA continue its efforts to improve its administration of the program, especially its efforts to prevent fraud.

This report examines the arguments presented both for and against targeting assistance to geographic areas with specified characteristics, such as low income, high poverty, or high unemployment, as opposed to providing assistance to people or businesses with specified characteristics. It then assesses the arguments presented both for and against the continuation of the HUBZone program.

The report also discusses the HUBZone program’s structure and operation, focusing on the definitions of HUBZone areas and HUBZone small businesses and the program’s performance relative to federal contracting goals. The report includes an analysis of (1) the SBA’s administration of the program, (2) the SBA’s performance measures, and (3) the effect of the release of economic date from the 2010 decennial census on which areas qualify as a HUBZone.

This report also examines congressional action on P.L. 111-240, the Small Business Jobs Act of 2010, which amended the Small Business Act to remove certain language that had prompted federal courts and the Government Accountability Office (GAO) to find that HUBZone set-asides have “precedence” over other small business set-asides. It also discusses several bills introduced during the 112
th Congress to extend the eligibility for firms that lost their HUBZone redesignated eligibility status due to the release of economic data from the 2010 decennial census, including H.R. 2131, the Protect HUBZones Act of 2011; S. 1756, the HUBZone Protection Act of 2011; S. 633, the Small Business Contracting Fraud Prevention Act of 2011; and S. 3572, the Restoring Tax and Regulatory Certainty to Small Businesses Act of 2012. S. 633 and S. 3572 would also require the SBA to implement several GAO recommendations designed to improve the SBA’s administration of the program. Also, S. 3254, the National Defense Authorization Act for Fiscal Year 2013, as amended, would extend HUBZone eligibility for BRAC base closures for an additional five years.


Date of Report: December 13, 2012
Number of Pages: 34
Order Number: R41268
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Thursday, December 27, 2012

The Sustainability of the Federal Budget Deficit: Market Confidence and Economic Effects



Marc Labonte
Specialist in Macroeconomic Policy

The budget deficit has exceeded $1 trillion since 2009. Combined with a shrinking economy, deficits increased the publicly held federal debt by over 30 percentage points of GDP between 2008 and 2012. Deficits of this size are not sustainable in the long run because the federal debt cannot indefinitely grow faster than output. Over time, a greater and greater share of national income would be devoted to servicing the debt, until eventually the government would be forced to finance the debt through money creation or default.

The current policy debate on the “fiscal cliff” occurring at the end of 2012 has raised the question of whether a deficit of the current magnitude is manageable and what risks it poses to the economy. Since deficit reduction could have a contractionary effect on the economy in the short run at a time when the economy is still fragile, restoring fiscal sustainability poses another set of risks that must be balanced against the risks of continuing an unsustainably large deficit. This report will evaluate sustainability issues.

Although the debt cannot persistently rise relative to GDP, it can rise for a time. It is hard to predict at what point bond holders would deem it to be unsustainable. A few other advanced economies have debt-to-GDP ratios higher than that of the United States. Some of those countries in Europe have recently seen their financing costs rise to the point that they are unable to finance their deficits solely through private markets. But Japan has the highest debt-to-GDP ratio of any advanced economy, and it has continued to be able to finance its debt at extremely low costs.

If investors on balance deemed the debt to be unsustainable, the yields and the cost of credit default swaps on Treasury securities would be expected to rise. Instead, both are currently low. This may seem surprising, given that the debt is currently growing more rapidly than output and is projected to continue to do so under current policy. The willingness of bond holders to finance the federal debt at low interest rates in light of these projections suggests that they believe that policy changes will eventually be made to place the federal debt on a sustainable path. This belief could change at any time; if it did, the experience of foreign countries suggests that the effects on the economy and financial markets could be severe. A failure to raise the debt limit or a ratings downgrade of U.S. debt by a credit rating agency are two events that have been seen as potential catalysts for a change in investor sentiment, although the downgrade when the debt nearly reached its statutory limit in 2011 did not result in higher yields.

According to standard macroeconomic theory, large deficits have temporarily boosted overall spending at a time when there is significant slack in the economy. Once private investment demand recovers, a large deficit would be expected to “crowd out” private investment spending. By accounting identity, domestic investment spending equals national saving plus net borrowing from abroad. The budget deficit has been equal to about half of private saving over the last three years. Even before the increase in the deficit, national saving was insufficient to finance domestic investment spending, and the United States was borrowing from abroad at unprecedented rates, peaking at about 6% of GDP. (Borrowing from abroad has since fallen by half, but remains relatively high.) To sustain large deficits, the economy will require some combination of higher private saving, lower investment, and higher borrowing from abroad. Some economists have argued that borrowing much more than 6% of GDP from abroad is unrealistic, and the already heavy U.S. reliance on borrowing from abroad makes the maintenance of a large budget deficit even less sustainable.



Date of Report: December 14, 2012
Number of Pages: 19
Order Number: R40770
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Wednesday, December 26, 2012

Disaster Unemployment Assistance (DUA)



Julie M. Whittaker
Specialist in Income Security

Disaster Unemployment Assistance (DUA) benefits are available only to those individuals who have become unemployed as a direct result of a declared major disaster. First created in 1970 through P.L. 91-606, DUA benefits are authorized by the Robert T. Stafford Disaster Relief and Emergency Relief Act (the Stafford Act), which authorizes the President to issue a major disaster declaration after state and local government resources have been overwhelmed by a natural catastrophe or, “regardless of cause, any fire, flood, or explosion in any part of the United States” (42 U.S.C. 5122(2)).

The DUA program provides income support to individuals who become unemployed as a direct result of a major disaster and who are not eligible for regular Unemployment Compensation (UC) benefits. DUA is funded through the Federal Emergency Management Agency (FEMA) and is administered by the Department of Labor (DOL) through each state’s UC agency. DUA beneficiaries (because they are not entitled to regular UC) are not eligible to receive Extended Benefits (EB) or Emergency Unemployment Compensation (EUC08) benefits.

S. 3655, would extend the maximum weeks of DUA benefits from 26 to 39 weeks for those individuals receiving DUA because of Hurricane Sandy. In adition, the bill would reimburse states for regular state UC payments that are based on unemployment attributable to Hurricane Sandy.

This report contains information on how to ascertain if an individual is eligible for DUA benefits.



Date of Report: December 6, 2012
Number of Pages: 9
Order Number: RS22022
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