SBA Agency Financial Report FY 2009 — Foreword and Management's Discussion and Analysis
Summary
This section of the SBA's Agency Financial Report for fiscal year 2009 includes the foreword, the table of contents, a primer of SBA's primary loan programs and the Message from the Administrator dated November 16, 2009. The foreword gives the report a due date of November 16, 2009 and says the Annual Performance Report and the Summary Report will be delivered February 2, 2010. The Administrator's message says Congress and the President included $730 million for the SBA in the American Reinvestment and Recovery Act, that the SBA provided more than 50,000 loans to small businesses this fiscal year, and that more than 1,200 lenders who had not made loans since October 2008 returned to SBA lending. It also says the SBA helped more than 25 percent of Recovery Act contracting dollars go to small businesses, a total of over $4 billion.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
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“SBA Agency Financial Report FY 2009 — Foreword and Management's Discussion and Analysis.”
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Agency
Financial
REPORT
2009
fiscal year
FOREWORD
The Government Performance and Results Act, enacted in 1993, requires federal agencies to establish standards for
measuring their performance and effectiveness. The law requires agencies to develop annual performance plans that
contain quantifiable measures of what they intend to accomplish, and performance reports describing their success
in meeting those standards and measures. Since March 2000 performance reports are to be released annually by all
CFO agencies.
Since FY 2007, the Small Business Administration has chosen to participate in an alternative approach to OMB’s con-
solidated Performance and Accountability Report. This report, the Agency Financial Report, is the first of three reports
required under the alternative program. It has a due date of November 16, 2009; the Annual Performance Report and
the Summary Report (titled “Summary of Performance and Financial Information”) will be delivered February 2, 2010.
Information about SBA’s programs is available at: www.sba.gov
Association of Government Accountants
SBA’s plans and reports are available at:
(AGA)
http://www.sba.gov/aboutsba/budgetsplans/index.html
Awards the Recovery Act - http://www.sba.gov/recovery/index.html
Certificate of Excellence Para información acerca de los programas de la SBA: www.sba.gov/espanol/
in Accountability Reporting
Requests for printed copies, or questions and comments regarding the content,
In recognition of your outstanding efforts in
presentation and usefulness of this report are welcome and may be addressed to:
performancereports@SBA.gov
preparing the Small Business Administration
Performance and Or, you may write to: Or, you may call:
Accountability Report U.S. Small Business Administration Timothy Gribben
Office of the Chief Financial Officer Director, Office of
for the fiscal years ended
409 Third Street, S.W. Performance Management
Suite 6000 (202) 205-6449
September 30, 2006, 2007 and 2008
Washington, DC 20416
Agenc
y Finan
Fiscal cial R
Year 2 eport
008
Helping
Small Bu
siness St
art, Grow
and Succ
eed
2006 2007 2008
TA B L E O F C O N T E N T S
Table of Contents
Message from the Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Management’s Discussion and Analysis
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SBA by the Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SBA’s History and Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Analysis and Highlights of Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Highlights of Financial Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Analysis of Financial Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Operational Portfolio Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Analysis of SBA’s Systems, Controls and Legal Compliance . . . . . . . . . . . . . . . . . . . . . . . 22
Internal Control Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Summary of Financial Statement Audit and Management Assurances . . . . . . . . . . . . . . . . . . 25
Improper Payments Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Other Management Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Summary Performance Information on Key SBA Programs . . . . . . . . . . . . . . . . . . . . . . 30
Financial Reporting
Message from the Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Audit and Financial Management Advisory Committee’s Report . . . . . . . . . . . . . . . . . . . . . 35
Inspector General’s Audit Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Independent Auditors’ Report on FY 2009 Financial Statements . . . . . . . . . . . . . . . . . . . . . 38
CFO Response to Draft Audit Report on FY 2009 Financial Statements . . . . . . . . . . . . . . . . . 49
Financial Statements and Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Office of the Inspector General Reports
OIG Audit Follow-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
OIG Report on the Most Serious Management and Performance Challenges . . . . . . . . . . . . . . . . 91
Agency Response to the OIG Report on Management and Performance Challenges . . . . . . . . . . . . 110
Appendices
Appendix 1 – Improper Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Appendix 2 – Contact SBA: Useful Sites and Numbers . . . . . . . . . . . . . . . . . . . . . . . . . 121
Appendix 3 – Glossary of Acronyms and Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . 122
Attached CD – Supplementary Information
SI 1 – Strategic Plan FY 2008-2013
SI 2 – SBA Offices
SI 3 – Detail of OIG Audit Follow-up Action Activity
Agency Financial Report FY 2009
Primer of SBA’s Primary Loan Programs
7(a) Loan Guarantees
This is SBA’s primary and most flexible loan program. Although it is delivered through com-
mercial lending institutions, it is for businesses that would not otherwise have qualified for a
loan through normal lending channels. The SBA guarantees a portion of 7(a) loans made and
administered by commercial lending institutions. The major types of 7(a) loan programs are:
SBAExpress, export loan programs, Rural Lender Advantage program, and the Special Purpose
loans program. SBA 7(a) loans can be guaranteed for a variety of general business purposes in-
cluding working capital, machinery and equipment, furniture and fixtures, and land and build-
ing. Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed
assets.
504 CDC Program
The 504 program, provides long-term, fixed rate financing for major assets such as real estate
and heavy equipment. The loans provide financing to acquire fixed assets for expansion or
modernization. They are delivered by Certified Development Companies, private, non-profit
corporations set up to contribute to the economic development of their communities. SBA
504 loans cannot be used for working capital or inventory, or consolidating or repaying debt.
The SBA guarantees 100 percent of a loan secured by the CDC, and requires at least a 10
percent owner equity buy-in as well as a non-guarantied loan from a private sector lender.
Microloan Program
This program provides small (up to $35,000) short-term loans for working capital or the pur-
chase of inventory, supplies, furniture, fixtures, machinery and/or equipment. It is designed for
small businesses and not-for-profit child-care centers needing small scale financing and techni-
cal assistance for start-up or expansion, and is delivered through specially designated interme-
diary lenders (nonprofit organizations with experience in lending and technical assistance).
The average loan is about $13,000.
Small Business Investment Companies (SBIC)
SBA’s Small Business Investment Company program provides venture capital to small firms.
SBICs are privately-owned investment companies that are licensed and regulated by the SBA.
The SBA provides financial assistance to SBICs to stimulate and supplement the flow of private
equity and long-term debenture funds to small companies. Venture capitalists participate in the
program to supplement their own private capital with funds borrowed at favorable rates through
SBA’s guaranty of SBIC debentures, which are sold to private investors.
M E S S A G E F R O M T H E A D M I N ISTRATOR
Message from the Administrator
November 16, 2009
I am pleased to present the U.S. Small Business Administration’s (SBA) FY
2009 Agency Financial Report. The SBA has chosen to produce the Agency
Financial Report as an alternative to the consolidated Performance and
Accountability Report (PAR). This report details the Agency’s efforts in its
mission to maintain and strengthen the nation’s economy by enabling the
establishment and vitality of small businesses and by assisting in the economic
recovery of communities after disasters. The SBA strives to accomplish this
mission by aiding, counseling, assisting and protecting the interests of small
businesses. The Agency continues to move forward with key goals in areas such
as access to capital, opportunities in government contracting, entrepreneurial
development, and disaster assistance.
Never before have SBA’s activities been more important. A deep recession combined with the financial
meltdown of October 2008 led to an extremely difficult environment for entrepreneurs to succeed and
for small businesses to survive and grow.
For this reason, Congress and the President included $730 million for the SBA in the American
Reinvestment and Recovery Act (Recovery Act) which passed in February 2009. This essentially
doubled SBA’s annual budget, providing both challenges and opportunities for this relatively small
federal agency to help unfreeze the credit lines in the small business lending market. The Recovery Act
enhancements to SBA programs supported billions of dollars in lending for tens of thousands of small
businesses throughout the country. Also, Recovery Act federal contracting dollars began to flow to the
small business community towards the latter half of the fiscal year.
Key SBA accomplishments in FY 2009 include:
Turnaround in SBA lending — The SBA ended the year strongly, with September 2009 having
the highest monthly SBA lending volume in two years through the Agency’s top two loan programs
(7(a) and 504). Average weekly SBA loan volume increased by 60 percent compared to the
weeks before the passage of the Recovery Act. Even in a difficult economic time, the SBA was able
to provide more than 50,000 loans to small businesses this fiscal year.
Increase in access to capital — Since the passage of the Recovery Act, more than 1,200
lenders who had not made loans since October 2008 returned to SBA lending. In fact, of those
lenders more than half had not made SBA loans since 2007.
Increase in small business contracting with federal agencies — Through stronger efforts to
coordinate and reach out to other federal agencies, the SBA helped more than 25 percent of all
federal agency Recovery Act contracting dollars go to small businesses in FY 2009. This amounted
to a total of over $4 billion. This contrasts with 21.5 percent in small business contracting for FY
2008.
Continued elimination of waste, fraud and abuse — Under the Recovery Act, the SBA strength-
ened its commitment to mitigating risk while eliminating waste, fraud and abuse. The Agency formed
senior level teams which systematically identified and reduced risks related to the implementation of
Recovery Act initiatives. In addition, the SBA continues to re-engineer the HUBZone contracting
Agency Financial Report FY 2009
1
M ESSA G E FR OM THE AD MIN ISTRAT O R
program to both improve efficiency and prevent fraud. In FY 2009, the Agency conducted nearly 900
site visites to ensure that participants in the program were legitimate small businesses. Going forward,
the SBA will be implementing stronger eligibility verification processes as well as enhancing the ability
to pursue and prosecute fraud.
Increase in entrepreneurial education resources — SBA’s grant-funded resource partners (about
900 Small Business Development Centers (SBDC), more than 100 Women’s Business Centers, and
more than 350 chapters of an executive mentoring program called SCORE) continued to experience
high demand for their free and/or low cost services from entrepreneurs and small business owners.
For example, the SBDCs have seen an increase of five percent, compared to last fiscal year, in the
number of “extended engagement” clients who need more than three hours of counseling. The SBA
also continued to reach out directly to small business owners through its 68-office network and by
developing new tools such as a popular online training module to introduce small business owners
to federal contracting.
Continued optimization of disaster assistance resources — The SBA has hired more full time
and on-call employees while acquiring critical “surge” space to prepare for a major catastrophe. Also,
the Agency has shortened disaster loan processing times, improved information technology capacity,
and strengthened its marketing and outreach efforts.
There continue to be many ways in which the Agency can improve its efforts to achieve operational ex-
cellence while increasing accountability and transparency. For example, the SBA continues to identify,
support and develop new and revised regulations and policies that will ensure that only small businesses
are benefiting from SBA contracting programs. The Agency will establish a more streamlined license
renewal process for Small Business Investment Companies that continue to support high-growth, high-
impact small businesses. The SBA will also continue to steward taxpayer dollars to strengthen areas such
as lender oversight, small business exporting, and outreach to underserved populations.
I am pleased to provide an assurance that SBA’s financial and performance data in this report are reliable
and complete. SBA’s auditor issued an unqualified opinion on our FY 2009 financial statements. The
auditor did note a material weakness in development and review of the alignment entry which adjusts
the net receivables for defaulted loan guaranties and liability for loan guaranties to their net present
value. This error was immediately corrected and the SBA is instituting a process to ensure that this does
not recur.
Overall, the Agency is renewing its commitment in FY 2010 to promote the growth, innovation and
global competitiveness of the U.S. small business community as it leads the country out of recession and
into recovery and prosperity in the 21st century.
Sincerely,
Karen G. Mills
Administrator
Agency Financial Report FY 2009
2
MANAGEMENT’s
DISCUSSION AND
ANALYSIS
Success Story
Beating the Odds
ASSET Group, Inc., Oklahoma City, Oklahoma
Jeanna Sellmeyer’s story is one of beating the odds and coming back on top.
She has survived daunting obstacles to lead her company, the ASSET Group, Inc.,
to to become one of the region’s most successful federal construction and re-
mediation contractors. The company has nearly 100 employees, more than $45
million in revenue and backlogs, and project locations from California to Florida.
An Oklahoma native, Jeanna founded ASSET in 1990 as an environmental
remediation firm that provides asbestos, lead based paint, hazardous materials
and mold remediation services to private and commercial clients. The company
posted annual revenues under $500,000 for its first ten years and operated from offices in California. It was during
this time that Jeanna was diagnosed with a brain tumor. Fortunately, her surgery was successful and led to a renewed
sense of purpose. “I had time to think about what to do next and decided I wanted to expand my business to pursue
construction and set my sights on federal contracts.” In 1999, the company became 8(a) certified as a minority,
woman owned small business. This year Jeanna was honored by the SBA as the 2009 National Small Business Person
of the Year.
M A N A G E M E N T ’ S D I S C U S S I O N & ANALYSIS
Executive Summary
The SBA acts as a direct lender or guarantor of from the Chief Financial Officer” letter and the
small business loans and provides management “Independent Auditors’ Report on FY 2009
and technical assistance and contracting op- Financial Statements.” During FY 2009, SBA’s
portunities to small businesses. The Agency also Office of Internal Controls continued to improve
provides disaster assistance to communities that the quality of financial reporting and credit sub-
have undergone catastrophes with the intention of sidy cost modeling for both regular programs and
rebuilding the devastated economy and commu- for the Recovery Act programs. Also, the Agency
nity simultaneously. reviewed the issues raised in its FY 2008 financial
audit and addressed the significant deficiency
In the past year, the SBA played a critical role in in information systems security, however, this
reviving the nation’s economy. When Congress continued to be a significant deficiency in FY
passed the American Reinvestment and Recovery 2009 audit results. The SBA continues to place a
Act, it identified the SBA as an agency that was high priority on transparency and accountability
vital to the stabilization of the economy and pro- through accurate and timely financial reporting.
vided the Agency with an opportunity to expand
some of its current programs and develop new Improper payments in SBA’s Disaster and 7(a)
programs in response to the crisis. The SBA is cur- guaranty purchase programs were audited by the
rently reporting on the success of these programs Inspector General. FY 2008 results for the 7(a)
on Recovery.gov and on SBA.gov/recovery. guaranty purchase program were restated this year.
Improper payment rates for 7(a) guaranty pur-
Financial Results chases increased to 3.8 percent in FY 2009 and the
rates for Disaster loans disbursed increased to 20.9
The SBA is the smallest of the federal credit agen- percent in FY 2009.
cies. Its budget for FY 2009 was $12.3 billion,
with $4.9 billion for budgetary resources and $7.4
billion for loan financing (nonbudgetary). As Program Results
of September 30, 2009, the SBA had guaranteed During FY 2009, the SBA reached out to strug-
$62.2 billion of loan principal, up 0.8 percent gling small businesses and provided them with
from the $61.7 billion guaranteed as of September funding through either regular SBA programs or
30, 2008. At the end of FY 2009, the total out- through Recovery Act programs. Despite the
standing balance of SBA’s total loan portfolio was economic downturn, the SBA approved 44,222
$90.5 billion, an increase of 2.7 percent above FY 7(a) loan guaranties and 6,608 Section 504 CDC
2008. SBA’s portfolio has increased 70 percent debenture guaranties, for a total of 50,830 in busi-
since FY 2001, and loan program receivables, ness loan guaranties. This access to capital pro-
which are comprised of business and disaster vided small businesses with the necessary financial
direct loans and defaulted guarantied loans, have support to survive the economic downturn.
also increased. These receivables were valued at
$9.1 billion this year, an increase of 7 percent over The SBA continued to advocate for small busi-
last fiscal year. An additional growth is expected nesses pursuing government contracting op-
in receivables through Recovery Act direct loans portunities. Congress has given the Agency the
and defaulted loan guaranties. responsibility of overseeing the government-wide
small business goal setting program. In FY 2008,
The Agency received an unqualified audit opinion federal agencies reported that $93.3 billion in
in FY 2009. The FY 2009 audit found one federal prime contract dollars went to small busi-
material internal control weakness in SBA’s finan- nesses. This is a $10.1 billion increase from FY
cial reporting which is discussed in the “Message 2007 ($83.2 billion). Also, the Agency continues
Agency Financial Report FY 2009
5
M ANAGE MENT’ S DISC U SSION & AN ALYS I S
to make progress with its process re-engineering of For FY 2009, the SBA approved 21,780 Disaster
the HUBZone program, a program which advo- loans for $1.2 billion. The Disaster Assistance
cates for small businesses located in disadvantaged program uses a new electronic application process
areas. which represents 36 percent of applications re-
ceived; this application has improved the respon-
SBA’s resources partners — the Small Business siveness and efficiency of SBA’s disaster assistance
Development Centers, Women’s Business Centers, operations.
and SCORE — provided counseling and expertise
to an estimated 1.1 million small business and
entrepreneurs. These resource partners provide Management Results
guidance in developing business plans, implement- The SBA continues to work with its program
ing new technologies, accessing capital, winning offices to provide the best possible measures of
government contracts, developing marketing performance. In FY 2009, the Agency was also
plans, and many other undertakings vital to the tasked with monitoring and reporting perfor-
success of a small business throughout its lifecycle. mance of the Recovery Act programs. The SBA
The SBA provided $128 million in FY 2009 in has worked closely with the Office of Management
grant funding for these programs to provide neces- and Budget to provide an accurate assessment of
sary, targeted technical services to entrepreneurs program activity to the President, Congress, and
throughout the nation. Additionally, an estimated the public.
600,000 users will access free online courses
through SBA’s Small Business Training Network. The SBA is also working with OMB to develop
high priority performance goals and has submitted
potential goals for OMB review.
Success Story
Veterans Provide Contracting Services
L & D Johnson Plumbing & Heating, Inc., Buffalo, New York
L&D Johnson Plumbing & Heating, Inc. is a certified SDVOSB, MBE, DBE & 8(a) contractor.
The company was started by Lenny Johnson, President and CEO, and Don Johnson, Vice
President, in 1999. With an initial investment of $7,500, the company has grown to a
staff of 24 and has taken on work in excess of three million dollars.
As a service disabled veteran company, L&D Johnson Plumbing & Heating, Inc. works as a
commercial contracting company with small jobs that range from school plumbing and
remodeling to larger jobs, such as the complete floor renovation of a VA Hospital.
L&D Johnson Plumbing & Heating, Inc. has extensive experience as the prime contractor
in numerous areas that include plumbing, heating, abatement, demolition and general construction. In addition to the govern-
ment contracted jobs, L&D Johnson Plumbing & Heating, Inc. continues to work in the public sector with local school districts and
businesses.
The mission of L&D Johnson Plumbing & Heating Inc. is to provide a reliable service and to maintain hard working standards to
better serve the public sectors.
Agency Financial Report FY 2009
6
M A N A G E M E N T ’ S D I S C U S S I O N & ANALYSIS
(All Dollars in Milions) FY 2006 FY 2007 FY 2008 FY 2009
Financial Assistance
7(a) Regular Loans (1) Dollars of Loans Approved $ 14,528 $ 14,292 $ 12,671 $ 9,191
504 Regular Loans (1) Dollars of Loans Approved $ 5,730 $ 6,314 $ 5,290 $ 3,834
Microloans Dollars of Loans Approved $ 19 $ 21 $ 20 $ 23
SBIC Dollars of Financings Approved $ 477 $ 759 $ 1,030 $ 788
7(a) Loans (1) Number of New Loans Approved 97,291 99,606 69,434 41,289
504 Loans (1) Number of New Loans Approved 9,943 10,669 8,883 6,608
Microloans Number of New Loans Approved 2,395 2,427 2,682 2,715
SBIC Number of Small Businesses Financed 2,121 2,057 1,905 1,481
Disaster Assistance (1)
Disaster Dollars of Loans Approved $ 11,675 $ 1,407 $ 954 $ 1,208
Disaster Number of Loans Approved 137,803 13,716 15,128 21,780
Total Portfolio (1) (2)
Total Total Outstanding Principal Balance $ 78,107 $ 84,512 $ 88,095 $ 90,451
Management Assistance
SCORE Number Small Businesses Assisted 308,710 336,411 360,559 380,357
SBDC (5) Number Small Businesses Assisted 667,660 600,665 558,487 583,770
WBC (6) Number Small Businesses Assisted 129,373 146,828 159,879 155,383
Procurement Assistance
Prime Contracting (3) Annual Value of Federal Contracts $ 77,670 $ 83,275 $ 93,305 N/A
Surety Bond Number of Final Bonds Guaranteed 1,706 1,640 1,576 1,220
HubZone (3) Annual Value of Federal Contracts $ 7,162 $ 8,463 $ 10,157 N/A
8(a) Program (3) Number of Small Businesses Assisted 9,600 9,479 9,462 N/A
Regulatory Assistance
Advocacy (4) Regulatory Cost Savings $ 7,250 $ 2,568 $ 10,760 $ 6,990
(1) In prior fiscal years, this table has presented “Disbursement/funded” loans for the Financial Assistance, Disaster Assistance and Total Portfolio. This table now presents
“Gross Approvals” of both the value and number of total loans approved. The SBA prefers this measure because it better represents the loan portfolio processed by the SBA.
There is a substantial difference in the two measures. The “Gross Approvals” loan numbers are approximately 15 percent higher for guarantied loans (7(a) and 504 loans),
and 46 percent higher for Disaster direct loans, than “Disbursement/funded” loans. Disaster loans are substantially higher when counting Gross Approvals because many
potential borrowers get initially approved and then decline the loan because they receive insurance payments; they are awarded grants; or they decide not to rebuild.
(2) This includes all Disaster and Business Loans.
(3) Federal agencies have not yet certified their FY 2009 data. The SBA expects to receive the FY 2009 certified data by the 3rd or 4th quarter of FY 2010.
(4) The FY 2009 number will be finalized in February 2010 in Advocacy’s annual report to Congress.
(5) The number of small businesses assited by Small Business Development Centers is slightly understated as two centers had not submitted 4th quarter activity at the time of
this report.
(6) The number of small businesses assisted by Women’s Business Centers has been annually trending upward. The decline in 2009 is atributable to several centers exiting the
program.
N/A - Not Available
Agency Financial Report FY 2009
7
M ANAGE MENT’ S DISC U SSION & AN ALYS I S
SBA’s History and Organization
resource partners in all 50 states, the District of
Columbia, Puerto Rico, American Samoa, the U.S.
Congress created the U.S. Small Business Virgin Islands, and Guam.
Administration in 1953 to “aid, counsel, assist and
protect, insofar as is possible, the interests of small The SBA is organized around five key func-
business concerns.” The charter also stipulated tional areas: Financial Assistance, Procurement
that the SBA would ensure small businesses a “fair Assistance, Management and Technical Assistance,
proportion” of government contracts and sales of Disaster Assistance and Regulatory Assistance.
surplus property. SBA’s mission is to maintain and The category of Other Assistance captures all
strengthen the nation’s economy by enabling the other activities. Following are brief descriptions
establishment and vitality of small businesses and of the SBA offices and some of the products and
by assisting in the economic recovery of communi- services they provide.
ties after disasters. Agency programs also include
management assistance and specialized outreach Financial Assistance
to veterans, women and underserved markets.
Since its inception, the SBA has made or guaran- The Office of Capital Access assists small busi-
teed in excess of $211 billion in business loans. nesses in obtaining capital via the 7(a), 504 and
Microloan programs and the Small Business
The disaster loan program is the only form of SBA Investment Company program. OCA is also re-
assistance that is not limited to small businesses. sponsible for the Surety Bond Guarantee and the
Disaster loans help homeowners, renters, business- International Trade Assistance programs.
es of all sizes, and nonprofit organizations to fund
rebuilding and recovery efforts. The Agency does Procurement Assistance
this by focusing on the restoration of real and per-
The Office of Government Contracting and
sonal property and assisting businesses to return to Business Development provides assistance to small
operations as quickly as possible. On average, the business in obtaining federal procurement op-
Agency makes disaster loans totaling approximate- portunities through the government-wide Prime
ly $1 billion each year and has an active portfolio and Subcontracting programs. Additionally, the
of about $8.4 billion. Since its inception, the SBA 8(a) Business Development program assists small
has approved over 1.8 million disaster loans for businesses to be better prepared to take advantage
over $47 billion. of procurement opportunities. GC/BD also sets
size standards for small businesses which deter-
The SBA plays a vital role in enabling America’s mine when a business will be considered a small
entrepreneurs and has stamped its mark on many business.
small businesses that have grown to become house-
hold names and leaders in their fields. These firms
Management and Technical Assistance
include Federal Express, Staples, Jenny Craig,
Under Armour, Intel, Sun Microsystems, Radio The Office of Entrepreneurial Development
One, Hewlett Packard, and a host of others. provides business counseling and training through
its partners network composed of Small Business
Development Centers, Women Business Centers
Organization by Key Assistance Areas and SCORE. In addition, district offices provide
The SBA is an organization with a nation- counseling and training that complements the as-
wide presence. Its headquarters is located in sistance provided by SBA’s partners.
Washington, D.C., while its business products and
services are delivered with the help of 10 regional
offices, 68 district offices and a vast network of
Agency Financial Report FY 2009
8
M A N A G E M E N T ’ S D I S C U S S I O N & ANALYSIS
Disaster Assistance Other Assistance
The Office of Disaster Assistance provides The Office of Veterans Business Development
affordable, timely and accessible financial formulates and delivers policies and programs that
assistance to homeowners, renters and provide assistance to veterans seeking to start and
businesses following a disaster. develop small businesses.
The Office of Native American Outreach focuses
Regulatory Assistance on the assistance provided to American Indians,
The Office of Advocacy provides an independent Alaska Natives, Native Hawaiians, and the indig-
voice for small businesses to advance their views, enous people of Guam and American Samoa.
concerns, and interests before Congress, the
federal government, federal courts and state policy
makers.
The National Ombudsman receives complaints
and comments from small businesses and acts as
a “trouble shooter” between small businesses and
federal agencies.
Did What do Vermont Teddy Bear, Vera Bradley Designs and the Jelly Belly Candy Co. have
you in common? They have all benefited from advice and counsel through SCORE – an
know SBA resource partner whose members serve as advisors and mentors to aspiring
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Agency Financial Report FY 2009
9
M ANAGE MENT’ S DISC U SSION & AN ALYS I S
ORGANIZATION CHART
OFFICE OF ADVOCACY
Executive Office of Disaster Administrator
Strategic Planning and Operations
OFFICE OF INSPECTOR GENERAL
Office of
Office of Government
Disaster Assistance Office of Entrepeneurial Office of Field Operations
Office of Capital Access Contracting & Business
Development
Development
Office of Financial Office of Office of Government Regional
Assistance Small Business Contracting Administrators
Office of Administration Development Centers
Office of Investment Office of HUBZone District Directors
Office of
Women’s
Office of Business Ownership Office of Business
Surety Guarantees Development
Office of
Office of Entrepreneurship
International Trade Education
Office of Credit Risk
Management
Office of the Chief Financial Office of National Ombudsman
Office of Management Office of the Office of Congressional
Officer and Associate and Assistant Administrator
& Administration General Counsel & Legislative Affairs
Administrator for for Regulatory
Performance Management Enforcement Fairness
Office of Human
Office of the Deputy Office of the Office of Communications Office of Hearings
Capital Management
Chief Financial Officer Chief Information Officer & Public Liaison & Appeals
Office of
Business Operations
Office of Performance
Management Office of Chief
Office of Policy & Office of Faith Based
Technology Officer
Office of Strategic Planning Community Initiatives
Executive Secretariat
Office of Internal
Controls
Office of
Equal Employment Office of Office of Veterans
Opportunity & Native American Affairs Business Development
Civil Rights Compliance
Agency Financial Report FY 2009
10
M A N A G E M E N T ’ S D I S C U S S I O N & ANALYSIS
Analysis and Highlights of Financial Statements
Highlights of Financial Results
(Dollars in Thousands) Unaudited % Change
At End of Fiscal Year FY 2009 FY 2008
Condensed Balance Sheet Data
Fund Balance with Treasury $ 3,469,465 $ 3,880,755 -10.60%
Credit Program Receivables 9,128,496 8,522,941 7.11%
All Other Assets 28,498 44,519 -35.99%
Total Assets $ 12,626,459 $ 12,448,215 1.43%
Liability for Loan Guaranties $ 3,994,636 $ 1,825,551 118.82%
Debt with Treasury 10,878,283 9,473,227 14.83%
Downward Reestimate Payable to Treasury 64,875 466,887 -86.10%
All Other Liabilities 377,265 348,420 8.28%
Total Liabilities 15,315,059 12,114,085 26.42%
Unexpended Appropriations 1,983,504 1,696,866 16.89%
Cumulative Results of Operations (4,672,104) (1,362,736) -242.85%
Total Net Position (2,688,600) 334,130 -904.66%
Total Liabilities and Net Position $ 12,626,459 $ 12,448,215 1.43%
For the Fiscal Year
Statement of Net Cost by Strategic Goal
Goal 1: Expand America’s Ownership Society
Loan Subsidy Cost including Reestimates $ 4,803,699 $ 441,919 987.01%
All Other Cost Net of Revenue 439,889 404,490 8.75%
Goal 2: Provide Timely Financial Assistance Affected by Disaster
Loan Subsidy Cost including 354,947 351,816 0.89%
All Other Cost Net of Revenue 320,381 233,046 37.48%
Goal 3: Improve Economic Environment for Small Business 14,506 14,114 2.78%
Costs Not Assigned 62,294 119,931 -48.06%
Total Net Cost of Operations $ 5,995,716 $ 1,565,316 283.04%
Statement of Net Cost by Expense Type
Loan Subsidy Cost and Required Annual Reestimates $ 5,158,646 $ 793,735 549.92%
Goal 1 Administrative Costs 439,889 404,490 8.75%
Goal 2 Administrative Costs 320,381 233,046 37.48%
Goal 3 Costs 14,506 14,114 2.78%
Congressional Initiative Grants 43,635 63,065 -30.81%
Other Costs Not Assigned 18,659 56,866 -67.19%
Total Net Cost of Operations $ 5,995,716 $ 1,565,316 283.04%
Condensed Statement of Net Position
Beginning Cumulative Results of Operations $ (1,362,736) $ (571,343) -138.51%
Total Financing Sources 2,686,348 773,923 247.11%
Less: Net Cost of Operations 5,995,716 1,565,316 283.04%
Ending Cumulative Results (4,672,104) (1,362,736) -242.85%
Beginning Unexpended Appropriations 1,696,866 974,211 74.18%
Total Budgetary Financing Sources 286,638 722,655 -60.34%
Ending Unexpended Appropriations 1,983,504 1,696,866 16.89%
Ending Net Position $ (2,688,600) $ 334,130 -904.66%
Condensed Statement of Budgetary Resources
Net Appropriations & Budget Authority Received, Budgetary $ 3,050,068 $ 2,060,201 48.05%
Nonbudgetary Borrowing Authority 3,455,566 1,346,805 156.58%
Unobligated Balances Forward 2,976,819 5,301,144 -43.85%
Other Budgetary Resources, net 2,854,602 401,904 610.27%
Total Budgetary Resources $ 12,337,055 $ 9,110,054 35.42%
Obligations Incurred, Budgetary 3,453,667 1,588,122 117.47%
Obligations Incurred, Nonbudgetary 6,181,465 4,545,113 36.00%
Balances, Available and Unavailable 2,701,923 2,976,819 -9.23%
Total Status of Budgetary Resources $ 12,337,055 $ 9,110,054 35.42%
Agency Financial Report FY 2009
11
M ANAGE MENT’ S DISC U SSION & AN ALYS I S
Analysis of Financial Results definitions of the loan and guaranty balances in
the Portfolio Analysis section may differ somewhat
The SBA prepares its financial statements as a
from the balances used in this Analysis of Financial
critical aspect of ensuring the accountability and
Results. For example, for the 7(a) program the total
stewardship for the public resources entrusted to
amount of guarantied loans is used in the Portfolio
it. The financial statements are prepared in ac-
Analysis, where only SBA’s guarantied portion is
cordance with guidance issued by the Office of
used in the Analysis of Financial Results, as it ties to
Management and Budget pursuant to the Chief
balances in the financial statements.
Financial Officers Act of 1990. While these state-
ments have been prepared from SBA’s books and
records in accordance with generally accepted Background
accounting principles for federal entities and the The SBA is the smallest of the major federal credit
formats prescribed by OMB, they are in addition to agencies, behind the Department of Agriculture,
the financial reports used to monitor and control the Department of Education, the Department
budgetary resources, which are prepared from the of Housing and Urban Development and the
same books and records. The statements should be Department of Veterans Affairs. Most of SBA’s
read with the realization that they are a component available budgetary resources are devoted to its
of the U.S. Government, a sovereign entity. One credit programs. For FY 2009 SBA’s available
implication of this is that the liabilities presented budgetary resources were $4.9 billion, and non-
herein cannot be liquidated without the enactment budgetary resources in the loan financing funds
of appropriations, and ongoing operations are sub- were $7.4 billion. The budgetary resources are the
ject to the enactment of future appropriations. amounts available to enter into new obligations and
to liquidate them. Budgetary resources are made up
This analysis is intended to help readers under- of new budget authority and unobligated balances
stand the Agency’s financial results, position and of budget authority provided in previous years. The
condition as portrayed in the principal financial loan financing funds are nonbudgetary accounts
statements and notes. It explains major changes that record all the cash flow activity resulting from
in assets, liabilities, costs, and budgetary resources; post 1991 direct loans and loan guaranties. This ac-
includes comparisons of the current year to the tivity in the financing account is reported separately
prior year; and discusses the relevance of particular in the Budget of the United States Government and
balances and amounts reflected in the principal is excluded from the budget surplus/deficit totals.
financial statements and notes. This section also
depicts trends via the use of charts and graphs to The portion of the outstanding principal guar-
further understanding of the financial condition anteed by the SBA as of September 30, 2009 was
and results of the Agency. The SBA is primarily a $62.2 billion. This amount is up 0.81 percent from
credit agency and therefore the trends and finan- the $61.7 billion guaranteed at September 30,
cial condition of credit program receivables and 2008. The downturn in the nation’s economy in
reestimates are emphasized in this analysis. The FY 2009, however, impacted the demand for SBA
Highlights of Financial Results chart provides a loans and resulted in a decrease in the approval and
condensed summary of the balances in the financial disbursement of new SBA guarantied loans. New
statements for the current and prior year and the guaranties disbursed by SBA participating banks
percentage change. during FY 2009 were down 30 percent compared
to FY 2008 (see footnote 6C for further detail
The Portfolio Analysis section in this MD&A on loans disbursed and outstanding at year end).
discusses in some detail the major trends impacting Chart I depicts the downward trend in guarantied
SBA’s portfolio of loan guaranties and receivables. loans disbursed during FY 2009. However, despite
The purpose of this section is to provide an op- the steep drop in the guarantied loans disbursed
erational analysis of SBA’s credit programs, rather overall for the fiscal year, there was an improvement
than a financial statement analysis. As a result, the in the end of the fiscal year due to the improvement
Agency Financial Report FY 2009
12
M A N A G E M E N T ’ S D I S C U S S I O N & ANALYSIS
in the economic and credit market conditions and the Recovery This increase resulted from increased
Act legislation. In February 2009, as part of the recovery package, purchases as a result of the downturn
Congress allocated $730 million for the SBA to provide new lend- in the economy and credit markets
ing incentives that included the Agency temporarily waiving its during FY 2009. Purchases of SBA’s
fees and increasing the guaranties it offers banks on 7(a) loans. share of defaulted guarantied loans
increased from $2.1 billion in FY
Chart I
2008 to $3.9 billion in FY 2009.
Guarantied Loans Disbursed SBA’s assets and liabilities result pri-
16
marily from its credit program activi-
14
ties. They consist of Fund Balances
12
with Treasury, credit program re-
($ Billions)
10 ceivables, liabilities for loan guaran-
8 ties, and Debt with Treasury. SBA’s
6 loans and guaranties are financed by
4 a combination of subsidy appropria-
2 tions, fees charged to lenders and
0 borrowers, and borrowings from the
2006 2007 2008 2009 Treasury. Congress provides appro-
Fiscal Year priations to cover the estimated long-
term costs of SBA’s disaster loans,
while SBA’s guarantied business loan
SBA’s portfolio of loans receivable continued to grow in FY 2009. program costs are financed through
Credit program receivables for the SBA are comprised of business fees. These costs are defined as the
and disaster direct loans and defaulted business loans purchased net present value of the estimated
per the terms of SBA’s loan guaranty programs. These receivables cash outflows and inflows associ-
were valued at $9.1 billion in FY 2009, an increase of 7 percent over ated with the loans. The remaining
last fiscal year. As reflected in Chart II, the primary reason for the portion of each new direct loan
increase in credit program receivables from FY 2008 to FY 2009 is disbursed is financed under perma-
due to an increase in defaulted guarantied business loans. nent indefinite authority to borrow
funds from Treasury’s Bureau of the
Chart II
Public Debt. Borrowings are repaid
to the Treasury as loans are repaid to
Total Credit Program Receivables the SBA.
10
8
Financial Position
6 Assets
($ Billions)
The SBA had total assets of $12.6
4
billion at the end of FY 2009, up
2 1.4 percent from FY 2008. Assets
increased primarily due to a $0.6 bil-
0 lion increase in the Credit Program
FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 Receivables because of the large
Direct Business Loans Direct Disaster Loans increase in the number of defaulted
Defaulted Guarantied Business Loans Total Credit Program Receivables guarantied business loans. This
increase in defaulted guarantied
business loans resulted from in-
Agency Financial Report FY 2009
13
M ANAGE MENT’ S DISC U SSION & AN ALYS I S
creased purchases as a result of the downturn in the 2008. Unfunded expenses do not yet have a
economy and credit markets during FY 2009. Per financing source. They result in an increase in
the provisions of the Federal Credit Reform Act of the loss the SBA reports as Cumulative Results
1990, credit program receivables are valued at the of Operations. The largest category of unfunded
present value of expected future cash flows. expenses at the SBA is year end reestimates which
are funded in the following year. Unexpended
Liabilities
Appropriations increased $286.6 million this
The SBA had total liabilities of $15.3 billion year because the appropriations used in FY 2009
at the end of FY 2009, up 26 percent from were less than the appropriations received. This
FY 2008. Liabilities consist primarily of the is primarily due to funding in the Recovery Act
Liability for Loan Guaranties and Debt with of February 2009 that provided $730 million of
Treasury. The Liability for Loan Guaranties is appropriations to the SBA in order to stimulate
defined as an estimate of the future amount the small business lending.
SBA will pay, net of fee collections, to liquidate
expected purchases of guarantied loans under
its guarantied loan programs. The Liability for Results of Operations
Loan Guaranties increased $2.2 billion primarily The Results of Operations primarily reflects the
due to the year end reestimate (offset partially by costs of SBA credit programs from subsidy ex-
claim payments). There was a net upward reesti- penses during the year for new loans and subsidy
mate of $4.7 billion in the loan guaranty pro- reestimates at year end. The credit subsidy cost
gram at September 30, 2009. Please refer to the is the net present value of expected cash inflows
following Results of Operations section which and outflows over the life of a guarantied loan, or
discusses the impact of the reestimates and to the difference between the net present value of
the chart in Note 6E of the financial statements expected cash flows and the face value of a direct
which reconciles this account. loan. The SBA receives appropriations annu-
ally to fund its credit programs. When loans
Debt with Treasury increased $1.4 billion as a are disbursed, the SBA records subsidy expense.
result of borrowings to cover the increases in In accordance with the Federal Credit Reform
purchases of defaulted loans. Purchases of SBA’s Act, the subsidy costs are reestimated annually.
share of defaulted guarantied loans increased Reestimates update original loan program cost
from $2.1 billion to $3.9 billion from FY 2008 to estimates to reflect actual experience and changes
FY 2009. Due to this unexpected surge in pur- in forecasts of future cash flows. Increased rees-
chases, the SBA borrowed funds from Treasury timated costs are funded in the following year by
to cover the purchases. permanent indefinite authority, while decreased
Net Position costs are returned by the SBA to a Treasury gen-
Net position, which is the sum of Unexpended eral fund. During FY 2009, the reestimated cost
Appropriations and Cumulative Results of for the 7(a) and the 504 loan programs signifi-
Operations, decreased in FY 2009 to $2.7 bil- cantly increased (guarantied business loan pro-
lion. Cumulative Results of Operations is the gram, Strategic Goal 1). Those increases were the
accumulated difference between expenditures largest components of the change (net increase)
and financing sources since the inception of the in the Agency’s net cost. Chart III reflects the
Agency. The loss shown as Cumulative Results increases in the reestimates for the Disaster direct
of Operations increased to $4.67 billion at the programs as well as the guarantied business loan
end of FY 2009 (from $1.36 billion last year) program from FY 2008 to FY 2009.
due to unfunded upward subsidy reestimates
that increased in FY 2009 on the 7(a) loan
guaranty and the 504 CDC program from FY
Agency Financial Report FY 2009
14
M A N A G E M E N T ’ S D I S C U S S I O N & ANALYSIS
were mostly due to the downturn in
the economy that resulted in higher
Chart III
than projected purchases during FY
Credit Program Subsidy Reestimates 2009 and an increase in projected
5
purchases for the remaining years
4 within the cohorts.
3 The SBIC debentures program had
$ Billions
2 net upward reestimates of $66.6
million. The reestimates were
1
mostly due to lower than projected
0 recoveries during FY 2009 and a
-1 decrease in projected recoveries
FY2005 FY2006 FY2007 FY2008 FY 2009 for the remaining years within the
Direct Disaster Loans Direct Business Loans Guarantied Business Loans cohorts.
The SBIC participating securi-
ties program had a net upward
Chart IV
reestimate of $960.2 million. The
reestimates were mostly due to the
Net Cost by Strategic Goal downturn in the economy that
7
resulted in lower than projected
6 recoveries and higher than project-
5 ed purchases during FY 2009 and
an increase in projected purchases
$ Billions
4
for the remaining years within the
3 cohorts.
2
The secondary market guaranty
1
program had a net downward
0 reestimate of $50.8 million. This
FY 2009 FY 2008 downward reestimate was due in
Fiscal Year
Costs Not Assigned Goal 2 Subsidy/Reestimates part to the lower than projected
Goal 3 Goal 1 All Other interest rate paid to investors dur-
Goal 2 All Other Goal 1 Subsidy/Reestimates ing FY 2009 and a decrease in the
projected interest rate paid to inves-
The increase in the overall Net Cost from FY 2008 to FY 2009 tors for the remaining years within
(see Chart IV) is primarily due to the increase in Strategic Goal the cohorts.
1 from the upward reestimates for the business loan guaranty
programs in FY 2009. The 7(a) loan guaranty program and the The 7(a) and 504 Recovery Act
504 loan program both had significant upward reestimates as programs had net upward reesti-
well as a significant change in the SBIC program from a down- mates of $72.4 million and $25.2
ward reestimate in FY 2008 to an upward reestimate in FY 2009. million respectively. These upward
The 7(a) loan program, SBA’s flagship and largest program, had reestimates are mostly due to up-
the largest net upward reestimates for the guarantied business dated model and economic assump-
loan programs in FY 2009 at $2.03 billion. The 504 Certified tions since the original budget es-
Development Companies program had net upward reestimates timates. The updated assumptions
of $1.57 billion. For both programs, the net upward reestimates result in an increase in projected
Agency Financial Report FY 2009
15
M ANAGE MENT’ S DISC U SSION & AN ALYS I S
purchases for the remaining years borrowing to cover increases in purchases of defaulted loans.
within the cohorts. Purchases of SBA’s share of defaulted guarantied loans in-
creased from $2.1 billion to $3.9 billion from FY 2008 to FY
There was also an increase in 2009. Due to this unexpected surge in purchases, the SBA was
Strategic Goal 1 in subsidy expense required to borrow funds from Treasury to cover these purchas-
incurred during FY 2009. This es (see explanation for Debt with Treasury). Appropriations
is due to the use of subsidy as- Received increased $1 billion from FY 2008 to FY 2009. The
sociated with the Recovery Act. increase in Appropriations Received correlates with the in-
The Recovery Act allocated $636 crease in Unexpended Appropriations due to the funding in
million of subsidy for loan guar- the Recovery Act legislation. In February 2009, as part of the
anties. In FY 2008, there was no stimulus package, Congress allocated $730 million for the
subsidy provided for the guaran- SBA to provide new lending incentives including the Agency
tied business loan programs. The temporarily waiving its fees and increasing the guaranties it
reestimates, however, accounted offers banks on 7(a) loans. Chart V depicts that the substantial
for most of the change in Strategic increase in Appropriations Received is for business loans due
Goal 1. to the Recovery Act. It also reflects the decrease in funding for
Strategic Goal 2 includes a net disaster loans because, in September 2008, the Disaster Relief
upward reestimate in the Disaster and Recovery Supplemental Appropriation Act had provided
direct loan program at year end appropriations of $799 million for the SBA.
and an increase in administrative Chart V
expenses during FY 2009 offset
by a decrease in subsidy expenses.
The Disaster program had net Appropriations Received
3.5
upward reestimates of $231.1 mil-
lion primarily in the 2006 cohort 3
that mostly consists of loans for 2.5
the Gulf Coast hurricanes of
$ Billions
2
2005. Those loans currently ac-
1.5
count for about 55 percent of the
outstanding portfolio of direct 1
disaster loans. The upward rees- 0.5
timates are primarily the result of
0
performance probabilities being FY 2007 FY 2008 FY 2009
updated with actual performance Fiscal Year
during FY 2009 that resulted in an
Disaster Loans Business Loans Salaries & Expenses
increase in projected defaults.
Budgetary Resources
Status of Budgetary Resources
Total Budgetary Resources in-
creased $3.2 billion from FY Total Status of Budgetary Resources increased $3.2 billion from
2008 to FY 2009. This increase is FY 2008 to FY 2009. This increase correlates with the increase
reflected by increases in Borrowing in the borrowing authority for business loans to cover the
Authority and Appropriations increase in purchases as well as the increase in credit program
Received. Borrowing Authority receivables for defaulted guarantied business loans. The SBA
increased by $2.1 billion in FY expects to continue to see an increase in obligations related
2009 from FY 2008 as a result of to purchases of defaulted guarantied business loans due to the
downturn in the economy.
Agency Financial Report FY 2009
16
M A N A G E M E N T ’ S D I S C U S S I O N & ANALYSIS
Operational Portfolio Chart VI
Analysis
Unpaid Principal
Portfolio Analysis Makeup of SBA Outstanding Loan Portfolio Balance
($ Billions)
The SBA is the taxpayers’ custodian 2009 49.7 23.8 6.8 1.8 8.4 $90.5
of a loan portfolio of $90.5 bil- 2008 47.7 22.3 8.3 1.1 8.6 $88.1
Fiscal Year
lion, as shown in Chart VI. This
2007 46.1 19.6 8.4 1.5 9.0 $84.5
portfolio of outstanding principal
loan amounts includes both guar- 2006 44.4 16.7 8.2 2.0 6.8 $78.1
antied and direct business loans as 2005 43.0 14.1 7.9 2.9 3.6 $71.5
well as direct disaster loans. SBA’s
2004 38.6 12.3 6.9 3.5 3.0 $64.4
two flagship guaranty business loan
0 25 50 75 100
programs, 7(a) and 504, continue to
comprise roughly 80 percent of its % of SBA Portfolio
outstanding loan portfolio. These 7(a) Regular 504 Regular SBIC Programs Other Disaster
two programs have also been the key
drivers of growth in the portfolio,
SBA Loan Volume in the Current Economy
accounting for 82 percent of the
The downturn in the nation’s housing market that began in the
portfolio’s growth in the past five
middle of FY 2006 turned into a broad economic contraction in
years. In FY 2009, while the overall
early 2008 and into a general credit crisis in the opening months of
portfolio grew by $2.4 billion, the
FY 2009. The severe contraction in the economy and in the credit
7(a) and 504 sections grew $2.7 bil-
markets drastically affected SBA’s loan volume. Many lenders can
lion, more than offsetting declines
increase the number of SBA-guarantied loans they offer by securi-
in other sections of the portfolio.
tizing their existing SBA guaranties and selling them on the second-
The overall growth rate has slowed
ary market to investors. When the collapse of Lehman Brothers in
considerably over the last few years,
the fall of 2008 provoked a crisis of confidence in banking circles,
from 8.2 percent in FY 2007 to 4.2
the entire secondary market of asset-backed securities (securitized
percent in FY 2008 to a low of 2.7
bundles of SBA-guarantied loans) nearly froze. As shown in Chart
percent in FY 2009. This slackening
VII, monthly volume in the 7(a) secondary market fell from its FY
of the growth rate is most likely due
2008 average of $328 million to an average of a little over $100
to the decline in economic condi-
million for the months of October to January.
tions that began with the housing
market crash in the fall of 2007 and Chart VII
its subsequent spread into the gen-
eral credit market in October 2008. 7(a) Secondary Market Settled Value
The disaster portfolio shrunk for the
second straight year, decreasing in 500
450
size by 2 percent, or roughly $200 9/2009
$399 M
400
million, in FY 2009. While major 350
($ million)
natural disasters like Hurricanes 300
Monthly Avg. to
9/2008: $328M
Gustav and Ike and the Midwest 250
floods caused new demand for 200
disaster loans, repayments on loans 150
from previous disasters led to an 100
50
overall drop in the disaster portfo-
-
lio’s balance. 1/08
2/08
3/08
4/08
5/08
6/08
7/08
8/08
9/08
10/08
11/08
12/08
1/09
2/09
3/09
4/09
5/09
6/09
7/09
8/09
9/09
Agency Financial Report FY 2009
17
M ANAGE MENT’ S DISC U SSION & AN ALYS I S
Since many banks use the capital raised on the the real sectors of the economy, small business
secondary market to lend more SBA loans, the revenues, cash flows, asset prices and ultimately
precipitous drop in the monthly volume in the loan demand declined. As seen in Chart VIII, the
secondary market filtered into a slowdown in monthly gross loan approval average for the 7(a)
the primary market for small business loans. As and 504 programs had nearly halved from a FY
a result, lending supply slowed considerably. 2008 average of $1.5 billion to $830 million for
Simultaneously, as the financial crisis spread across the months of October 2008 to January 2009.
Chart VIII
Monthly Gross 7(a) and 504 Loan Approvals
2.5
8/07 9/09
$1.94 B $1.92 B
2.0
($ Billions)
1.5 FY07 Average
$1.72 B Post-ARRA Average
FY08 Average $1.28 B
$1.50 B
1.0
FY09 Average
$1.09 B
0.5 Pre-ARRA Average
$0.83 B
0
10/06 1/07 4/07 7/07 10/07 1/08 4/08 7/08 10/08 1/09 4/09 7/09
thaw as well. One measure of the secondary mar-
Recovery Act Influence on Loan Volume
ket demand is the premiums investors are willing
With the passage of the Recovery Act on February to pay. In August 2009, 83 percent of loans settled
17, 2009, the SBA eliminated fees for borrowers on were sold at or above premiums of 106, the high-
SBA 7(a) loans and for both borrowers and lenders est share since August 2007. By comparison, zero
on 504 Certified Development Company loans. loans in the months of January or February were
The Agency also raised the guaranty on 7(a) loans sold at premiums at or above 106.
up to 90 percent. These measures stimulated small
business lending, and the past six months has seen Possible Reasons for Slow Growth of
increasing monthly loan approval volumes. By the SBA’s Loan Portfolio
third quarter of FY 2009, monthly volumes were According to the Senior Loan Officer Opinion
at nearly the same level as before the credit freeze Surveys released by the Federal Reserve Board,
which began in October 2008. The last month credit standards continued to tighten for commer-
of FY 2009, September, saw monthly gross loan cial loans to small firms. The primary reason given
approvals of $1.92 billion, the highest month on was the less favorable or more uncertain economic
record since August of 2007, before the housing outlook and also because of a reduced appetite for
market downturn. In addition to the increased risk. Corollary to this finding, senior loan officers
volume of lending, the secondary market began to noted that the decline in lending was due not only
Agency Financial Report FY 2009
18
M A N A G E M E N T ’ S D I S C U S S I O N & ANALYSIS
to the tightening of the loan supply but also to a weakened de- On the supply side of the small
mand for loans. business loan equation, Chart X
shows how banks began to tighten
As evidenced by Chart IX, for years the SBA loan approval their credit standards for small
volumes have closely tracked the Case-Shiller National Housing firms at the beginning of 2007. As
Price Index. When the housing market bubble burst in 2007, the crisis expanded, the percent-
the precipitous drop in housing prices found its way into the age of senior loan officers who said
world of small business. Many first-time entrepreneurs use the their banks were tightening credit
equity they have built in their houses as the collateral for their standards for their commercial
small business loans. As that equity shriveled, demand for small and industrial loans to small firms
business loans had a corresponding decline. reached its peak of 75 percent at
Chart IX the same time as the lowest point
of the credit crisis, the fourth quar-
SBA 7(a) Loan Appproval in Dollars ter of 2008.
&
Case-Shiller National Housing Price Index As more current data become
1990 thru Q2 of 2009 available, it is likely that the SBA
12 200 will see the effects of the Recovery
10
180 Act provisions to waive bor-
160
140
rower fees and increase SBA loan
($ million)
8
120 guaranties on this loan equation.
6 100 Reduced fees, a bottoming-out of
80 the housing market, and a re-
4 60 bounding in the general economy
40
2
20
will strengthen demand for small
0 0 business loans while the decrease
in risk associated with the higher
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
loan guaranty will lead to an
2004
2005
2006
2007
2008
2009
7a Approval - Real $ 7a Approval - Nominal $ Case Shiller Index expansion of supply from banks.
Chart X Indeed, the SBA has already seen
over 1,260 lenders who had not
Net Percentage of Domestic Respondents made any SBA loans since October
Tightening Standarts for Commercial and Industial Loans 2008 make new SBA loans since
the passage of the Recovery Act.
Of those newly-activated lenders,
100
Apr.Srvey over 760 had not made any SBA
80 loans since the housing market
60 started to decline in late 2007.
40
20
0
-20
-40
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Loans to Large and Medium-Sised Firms Loans to Small Firms
Agency Financial Report FY 2009
19
M ANAGE MENT’ S DISC U SSION & AN ALYS I S
Disaster Portfolio Trends The SBA’s portfolio of direct
Chart XI disaster loans decreased slightly
from about $8.9 billion in 2007 to
Disaster Unpaid Principal Balance $8.6 billion in 2008 to $8.4 billion
as of Sept 30, 2009
at the close of FY 2009. As Chart
World Trade Center Loans Business Loans
XI shows, the decline is most
$197,329,437 $1,461,857,946 likely due to continued repayments
on the historically large amount
Economic Injury Loans of loans given after Hurricanes
$265,378,113
Hurricanes Katrina, Rita, and Katrina, Rita, and Wilma. These
Wilma Home Loans
$3,465,997,412 Home Loans loans continue to make up over 50
$1,825,057,387 percent of the unpaid disaster loan
portfolio.
Hurricanes Katrina, Rita, and
Wilma Business Loans
Growth in the portfolio came
$1,207,173,383 from new loans associated with
Success Story
A “Mine” Blowing Success with Recovery Act
Dutchman Global, Florence, South Carolina
Following an overseas career, Dan Vander Meer realized an opportunity to start
his own small business – Dutchman Global, an export company supplying
heavy machinery to earthmoving and mining industries.
After just over four years in business, the six-employee company is a qualified
success, selling over 60 makes of equipment across the globe.
But in the current economic climate, capital can be hard to come by for a
small business, even one as successful as Dutchman Global. This is where
the SBA and the Recovery Act helped. In April 2009, Dan was approved for
an SBA export line of credit for $300,000 from Carolina First Bank. Under
the Recovery Act, the SBA backed 90 percent of the loan, and with the temporary elimination of guaranty fees, the
company has saved thousands of dollars.
But even before the recession, small business capital could be hard to come by. The SBA helped then too. In 2007
Dutchman Global was approved for two SBA revolving lines of credit for exports from BB&T.
“I found it so easy – it was incredible,” Dan says.
In fact, with a sale hanging in the balance for Dutchman Global, an SBA loan officer came in from vacation to work on
the company’s loan guaranty application. One week later, Dutchman Global got the approval notification.
“Where else do you get dedication like that?” Dan says. “There are people who care and banks that’ll work with you.”
Agency Financial Report FY 2009
20
M A N A G E M E N T ’ S D I S C U S S I O N & ANALYSIS
Hurricanes Gustav and Ike as well as the Midwest floods.
Combined, SBA approved over $1.2 billion in business and
home loans for these major events (Chart XII). Of this $12 bil-
lion for Gustav, Ike, and the Midwest Floods, 31.5 percent went
to business loans while 68.5 percent went to home loans.
The SBA also calculates the disaster charge-off rate as the dollar
volume of loans charged off divided by the dollar amount of the
disaster loan portfolio outstanding each quarter (Chart XIII).
Chart XII
Gross Dollars Approved - FY09 Major Events
(Millions)
Gustav
127.1
Midwest
416.9 Gross Approvals - By Disaster
Ike
700.3
Business
392.0
Home
Gross Approvals - By Disaster 852.4
Ike, Gustav, & Midwest Floods
Home vs. Business
The increase in charge-off rates that was observed over FY 2008
settled back down to around historical levels of about 0.8 per-
cent in FY 2009.
In hindsight, it is likely the spike in the fourth quarter of FY
2008 was due to the credit crunch that affected the entire econ-
omy after the credit markets froze in late September of 2008.
Chart XIII
Disaster Charge-Off Rates by Quarter
$ Charged off as Percentage of Unpaid Principal Balance
2.00
1.80
1.60
(% percent)
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0
FY2005 FY2006 FY2007 FY2008 FY2009
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Agency Financial Report FY 2009
21
M ANAGE MENT’ S DISC U SSION & AN ALYS I S
Analysis of SBA’s Systems, Controls and Legal Compliance
Internal Control Environment Internal Control Over Financial Reporting. The
OIC conducted SBA’s fourth annual assessment of
Internal Control
internal control over financial reporting to comply
The SBA believes that maintaining integrity and
with this circular. The revised A‑123 requires the
accountability in all programs and operations
managers of federal agencies to take the responsi-
is critical for good government, demonstrates
bility for assessing internal controls over financial
responsible stewardship over assets and resources,
reporting similar to that imposed on publicly trad-
ensures high quality, is a sign of responsible leader-
ed companies by the Public Company Accounting
ship, ensures the effective delivery of services to
Reform and Investor Protection Act of 2002 (the
customers, and maximizes desired program out-
“Sarbanes-Oxley Act” or “SOX”).
comes. The SBA has developed and implemented
management, administrative and financial system The Senior Assessment Team, chaired by the Chief
controls to reasonably ensure that: Financial Officer and comprised of SBA manag-
ers from the major programs and support offices,
• programs and operations achieve intended re-
directed this effort. The OIC reviewed the key
sults efficiently and effectively;
business processes impacting financial operations
• resources are used in accordance with the mis- and the financial statements. In addition, the SAT
sion of the Agency; members reviewed some of the business processes
with no material impact on the financial state-
• programs and resources are protected from ments, but which have some potential for risk or
waste, fraud and mismanagement; exposure for the Agency.
• program and operations activities are in compli- Based on the evaluation of 18 business processes,
ance with laws and regulations; and the OIC identified a number of deficiencies in the
internal control over financial reporting, includ-
• reliable, complete and timely data are main-
ing several in SBA’s key business areas. However,
tained and used for decision-making at all levels.
the OIC determined that most of the items were
The Federal Managers’ Financial Integrity Act of relatively minor and not reaching the level of
1982 requires federal agencies to conduct an an- significant deficiency. In one instance the OIC
nual assessment of internal control and report the identified non-compliance with applicable laws
results to the President. The conclusion of the and regulations. See the Legal Compliance sec-
Administrator’s Annual FMFIA assurance statement tion for detail.
is based on the self-assessment of program managers,
In addition, OIC also performed a review of the
internal control reviews, and audits and reviews done
Sacramento Loan Processing Center to help the
by the Government Accountability Office and the
Office of Capital Access determine the effective-
SBA’s Office of the Inspector General.
ness and efficiency of the internal controls in place
The SBA continues to strengthen and improve the for loan approvals made under the American
execution of its mission through the application Recovery and Reinvestment Act of 2009.
of sound internal controls. During FY 2009, the
Given the size of its $90 billion loan portfolio,
Agency created the Office of Internal Controls.
the SBA’s lender and loan monitoring and re-
The OIC is responsible for implementing the
view activities represent a critical component of
requirements of the Office of Management and
the Agency’s internal control framework. The
Budget’s revised Circular No. A-123, Appendix A,
Agency’s Office of Credit Risk Management rates
Agency Financial Report FY 2009
22
M A N A G E M E N T ’ S D I S C U S S I O N & ANALYSIS
and ranks lenders that disburse SBA-guarantied recommendations made by the Agency’s indepen-
loans according to risk. This analysis allows the dent auditor in the annual financial statements au-
SBA to focus resources on those lenders that repre- dit. Finally, the SBA also considers and responds
sent the most risk in terms of exposure and credit to recommendations from audits and reviews
quality. Larger lenders are subject to on-site re- conducted by the GAO.
views. The SBA also conducts reviews of Certified
Development Companies, examinations of Small During FY 2009, the OCFO continued to
Business Investment Companies, guarantied loan strengthen internal control over financial report-
purchase reviews and reviews of improper pay- ing and credit subsidy cost modeling through ad-
ments for business and disaster loans. ditional quality assurance procedures for validat-
ing loan program data at key points. The SBA also
Legal Compliance continued to strengthen its financial management
The SBA has identified one instance of non- team through communication on emerging issues
compliance with applicable laws and regulations and training activities.
as of September 30, 2009. At the beginning of
FY 2009, SBA management established a Debt In FY 2009 the OIG reported that the SBA needs
Collection Improvement Act team to solve the to improve its Improper Payment review process
problem where a small number of SBA loans were for both its flagship 7(a) loan program and its
not being referred to the Treasury for cross-servic- Disaster loan program. The OIG audited the
ing and for the Treasury offset. The team, com- Agency’s FY 2008 Improper Payment Review
prised of staff from the offices of Capital Access, process for the 7(a) loan program and the FY
Chief Financial Officer and Chief Information 2007 Improper Payment Review process for the
Officer, met biweekly during FY 2009. Due to Disaster loan program. According to the OIG re-
the diligence of the team, a larger number of ad- ports, the Office of Capital Access and the Office
ditional loans were identified that had not been of Disaster Assistance significantly underestimat-
referred to the Treasury for cross servicing nor for ed the improper payment rates, and the sample
the Treasury offset. The root cause of this error was design and measurement methodology was not
identified as a system coding issue. The error has appropriate. Although the program offices did
since been corrected and additional resources have not agree with all of the OIG’s findings, they
been allocated to refer these loans to the Treasury worked closely with the OIG to resolve differ-
within the next six months. A mitigation plan was ences and to improve SBA’s process for determin-
developed in consultation with Treasury and is in ing improper payments. As a result the program
place to ensure that this error does not occur in the offices consulted with statisticians and redesigned
future. their sampling methodology and testing criteria.
Due to the changes, the improper payment rate
Audit Follow-up for disaster loans increased significantly in FY
The SBA’s OIG conducts audits and reviews of the 2009 compared with FY 2008. However this
Agency’s operations, and the Office of the Chief increased rate does not reflect a greater risk in the
Financial Officer works closely with SBA manage- portfolio. The majority of the errors identified
ment and the OIG to complete actions necessary were the result of missing paperwork. The errors
to respond to OIG audits. The OCFO tracks the generally do not have an impact on the eligibility
completion of these audit recommendations, and of the borrowers to receive the funds or the will-
posts the status of all open OIG recommendations ingness and/or ability of the borrowers to repay
on the SBA’s Intranet for managers’ information. the disaster loans. See further details related to
In addition, The Agency’s financial and program- the Improper Payment review process and results
related internal control has improved substantially in the section titled Improper Payment.
over the years through the remediation of audit
Agency Financial Report FY 2009
23
M ANAGE MENT’ S DISC U SSION & AN ALYS I S
Information Systems • Work closely with the Office of Inspector
The SBA continues to have a significant deficiency General in updating the Standard Operating
in the information technology security controls. Procedure on Automated Information System
The Agency is sensitive to the need to protect SBA Security Program to clarify and strengthen
data, and plans to work diligently to improve both detailed procedures required to ensure security
process and performance in this critical area. The access controls are in place to protect SBA data
following steps to remediate findings pointed out from unauthorized modification, disclosure,
in the Auditors’ Report are being taken: and loss.
• Revise the Plan of Action & Milestone manage- • As a part of updating the SOP the Agency-wide
ment program, in conjunction with program of- security configuration policy will be updated to
fices, to track, monitor, and aggressively mitigate enhance the change control and patch manage-
vulnerabilities in all Agency systems. ment process. This is critical to ensure software
changes can be audited and tracked to avoid
• Incorporate new controls into the certification inadvertent or deliberate irregularities.
and accreditation process to effectively iden-
tify and manage security risks consistent with • Reissue policy for end-user computing and
the new revision of the Guide for the Security coordinate with program offices to develop new
Certification and Accreditation of Federal procedures to ensure sensitive data, such as finan-
Information Systems issued by the National cial data, is recorded and tracked.
Institute of Standards and Technology.
Did
you Small business owners may serve on a Regional Regulatory Fairness Board to
know advise the SBA National Ombudsman on matters of concern to small businesses
relating to the enforcement activities of federal agencies.
Agency Financial Report FY 2009
24
M A N A G E M E N T ’ S D I S C U S S I O N & ANALYSIS
Summary of Financial Statement Audit and Management Assurances
Following, as required by OMB Circular A-136, Section II.5.6, is the summary of SBA’s financial statement
audit and the summary of SBA’s Management Assurances:
Summary of Financial Statement Audit
Audit Opinion Unqualified
Restatement No
Beginning
Material Weaknesses New Resolved Consolidated Reassessed Ending Balance
Balance
Financial Reporting - The alignment 0 1 N/A N/A N/A 1
adjustment entry was improperly posted.
Summary of Management Assurances
Effectiveness of Internal Control over Financial Reporting (FMFIA § 2)
Audit Opinion Qualified
Beginning
Material Weaknesses New Resolved Consolidated Reassessed Ending Balance
Balance
Financial Reporting -
0 0 N/A N/A N/A 0
The alignment adjustment entry was improperly posted.
Effectiveness of Internal Control over Operations (FMFIA § 2)
Statement of Assurance Qualified
Beginning
Material Weaknesses New Resolved Consolidated Reassessed Ending Balance
Balance
None 0 1 N/A N/A N/A 1
Conformance With Financial Management System Requirements (FMFIA § 4)
Statement of Assurance Systems conform to financial management system requirements
Beginning
Non-Conformances New Resolved Consolidated Reassessed Ending Balance
Balance
None 0 0 N/A N/A N/A 0
Conformance With Federal Financial Management Improvement Act (FFMIA)
Agency Auditor
Overall Substantial Compliance Yes Yes
1. System Requirements Yes
2. Accounting Standards Yes
3. USSGL at Transaction Level Yes
Agency Financial Report FY 2009
25
M ANAGE MENT’ S DISC U SSION & AN ALYS I S
FMFIA and FFMIA Assurance Statement for FY 2009
The Small Business Administration continued to strengthen the internal controls over its programs and
operations during FY 2009. Creating a culture of responsibility and accountability while eliminating
and preventing waste, fraud and abuse is critical to meeting our mission at the SBA. I am pleased to
report that the SBA is on course to achieve its internal control objectives in the coming year.
The internal controls over SBA’s program operations continued to show improvement this year, and the
system in place is sound and efficient. Agency managers have issued assertions as to the status of their
FY 2009 internal controls, and these assertions are supported by internal testing, checklists and other
management reviews. Although Agency managers reported some operating deficiencies, these were not
of a material nature.
SBA’s independent auditors issued an unqualified opinion on the Agency’s FY 2009 financial statements
for the fifth year in a row. However, our auditor reported a material weakness in SBA’s financial report-
ing process. The error resulted from an overstated material error on SBA’s Loan Liability Guaranty
calculation, which is performed once a year under tight deadlines. In their review of this issue, SBA
auditors concluded that SBA lacked the controls to catch this type of error in its once-a-year financial
statement preparation process and, therefore, a material weakness exists. This finding, while material
in size, has marginal impact on SBA’s operations, and was corrected on the same day. Additionally, the
internal controls process has been corrected to avoid the weakness in the future.
SBA’s management is responsible for establishing and maintaining effective internal controls and finan-
cial management systems that meet the objective of the Federal Managers Financial Integrity Act. The
SBA is able to provide a qualified statement of assurance that the internal controls and financial manage-
ment systems meet the objectives of FMFIA, with the exception of the one material weakness described
in the previous paragraph.
The SBA conducted its assessment of the effectiveness of internal controls over the effectiveness and
efficiency of operations and compliance with applicable laws and regulations in accordance with OMB
Circular A-123, Management’s Responsibility for Internal Control. Based on the results of this evalua-
tion, and considering the independent auditor’s finding on the internal controls over financial reporting,
the Agency reports one material weakness in its internal controls over the effectiveness and efficiency
of operations as of September 30, 2009. The SBA also identified one instance of noncompliance with
applicable laws and regulations regarding debt collection that is described in a separate paragraph below.
Other than these two noted exceptions, the internal controls were operating effectively and no other
material weaknesses were found in the design or operation of internal controls.
In addition, SBA conducted its assessment of the effectiveness of internal controls over financial re-
porting, which includes safeguarding of assets and compliance with applicable laws and regulations, in
accordance with the requirements of Appendix A of OMB Circular A-123. Based on the results of this
evaluation, SBA can provide reasonable assurance that its internal control over financial reporting as of
June 30, 2009 was operating effectively and no material weaknesses were found in the design or opera-
tion of the internal control over financial reporting.
Agency Financial Report FY 2009
26
M A N A G E M E N T ’ S D I S C U S S I O N & ANALYSIS
During FY 2010, the SBA plans to complete remediation activities to address the audit findings associ-
ated with the material weakness in financial reporting. We plan to have such audit remediation activities
completed prior to reporting the June 30, 2010, quarterly financials. We will strengthen the documenta-
tion of our existing quality assurance procedures. We will conduct a review of our financial reporting
and quality assurance processes and implement identified solutions for improving accuracy and quality
in the financial statements. We will also look carefully at our year end schedule and process to reduce
the risk associated with year end processes. This will include further automating the year end Loan
Liability Guaranty calculation to make the process more efficient and reliable.
SBA management has identified one instance of non-compliance with applicable laws and regulations as
of September 30, 2009. At the beginning of FY 2009, SBA management established a Debt Collection
Improvement Act team to solve the problem where a small number of SBA loans were not being referred
to Treasury for cross-servicing and for the Treasury offset. However, due to diligence of the team a larger
number of additional loans were identified that had not been referred to the Treasury for cross-servicing
nor for the Treasury offset. The root of this error was identified as a system coding error. The error has
since been corrected and additional resources have been allocated to refer these loans to the Treasury
within the next six months. A mitigation plan was developed in consultation with the Treasury and is in
place to ensure that this error does not occur in the future.
The SBA’s OIG identified several issues in the audits of the Agency’s improper payment review of the
loan programs. SBA management is working with the OIG to further resolve these issues. SBA manage-
ment will take necessary actions to ensure the Agency has sufficient internal controls in place to mini-
mize improper payments and that it has an effective improper payment review process.
The Federal Financial Management Improvement Act requires federal agencies to implement and main-
tain financial management systems that are in substantial compliance with federal financial manage-
ment systems requirements, federal accounting standards, and the United States Government Standard
General Ledger at the transaction level. The SBA provides reasonable assurance that its financial man-
agement systems substantially comply with FFMIA for FY 2009.
Karen G. Mills
Administrator
November 16, 2009
Agency Financial Report FY 2009
27
M ANAGE MENT’ S DISC U SSION & AN ALYS I S
Improper Payments Summary and Little Rock, Arkansas that are centrally man-
aged by staff in Washington DC. The FY 2009
The Improper Payment Information Act of 2002
7(a) guaranty purchase improper payment rate was
requires that agencies: (1) review programs and
determined to be 3.81 percent or $68.8 million.
identify those susceptible to significant improper
In addition, last year’s improper payment rate of
payments; (2) report to Congress on the amount
0.53 percent has been restated by the SBA this
and cause of improper payments; and (3) develop
year to 3.20 percent. An issue on the purchase of
approaches for reducing such payments. Appendix
defaulted guaranties from secondary market hold-
C to Circular A-123 issued by OMB in August
ers is not yet resolved with the Inspector General,
2006 provides additional guidance on agency
and this may further increase the restated FY 2008
compliance with IPIA requirements. In addition,
improper payment rate. The Disaster program op-
OMB Circular A-136 provides guidance on the
eration includes a processing center in Fort Worth
form and content of IPIA reporting. SBA’s im-
and operation centers in Atlanta and Sacramento,
proper payment program and reporting is subject
as well as a Buffalo customer service center. The
to this guidance.
FY 2009 Disaster improper payment rate was
SBA’s four major credit programs are currently determined to be 20.9 percent or $168.5 million
included under IPIA reporting. They are the compared to 0.74 percent reported last year.
7(a) Loan Guarantee Program, the Section 504
It is important to note that the 7(a) guaranty
Certified Development Company Loan Program,
purchase review contains a number of judgmental
the Small Business Investment Company Program
considerations concerning whether the originating
and the Disaster Assistance Loan Program. SBA’s
lender exercised reasonable commercial care and
risk assessment of the 7(a), 504, and SBIC guar-
prudence in the execution, servicing and liquida-
anty approval programs for improper payment
tion of the loan in accordance with SBA loan
indicate a low level of risk, due to the internal
program requirements; and whether or not the
controls applied in these programs, and improper
lender’s actions or inactions have placed the SBA
payments are extremely low or non existent. The
at financial risk or contributed materially to the
SBA considers the 7(a) guaranty purchase pro-
loan default. The evaluation of the lender’s exer-
gram to have a medium risk of improper payments
cise of reasonable commercial lending practices is
due to the delegation of program authority to
critical and needs to be consistent with the lending
SBA’s lending partners in this nationwide pro-
practices exercised related to loans that did not
gram. The Disaster program has a low risk of loss,
default. The exercise of this judgment is critical
but an OIG audit found that compliance with the
to the viability of the 7(a) program as lenders can
paperwork required in Disaster program lending
chose whether or not to participate in the 7 (a)
procedures needs improvement.
program, and is especially relevant since over 90
The SBA Inspector General issued audit reports percent of SBA 7(a) loans are approved by lend-
on the 7(a) guaranty purchase ( July 2009) and ers using delegated authority where they make the
Disaster improper payments (March 2009). As a underwriting decisions.
result of findings and recommendations in these
The Disaster improper payment rate this year is
reports the SBA has changed the methodology
substantially greater than reported in prior years.
used in both of these programs in the sampling
The increased rate does not reflect a greater risk
and testing for improper payments. As a result, the
in the portfolio, only that the SBA is classifying
improper payment rates and dollars found in FY
improper payments differently than in the past.
2009 have increased.
In prior years improper payments represented
The 7(a) guaranty purchase operation includes loan funds that were disbursed to a borrower that,
centers in Herndon, Virginia, Fresno, California, based on SBA Standard Operating Procedures,
were not appropriate. The majority of errors
Agency Financial Report FY 2009
28
M A N A G E M E N T ’ S D I S C U S S I O N & ANALYSIS
identified this year were the result of missing loan for an improper payment in this category would
documentation. The errors generally do not have be the lack of appropriate eligibility or a non
an impact on the eligibility of the borrower to re- compliance with lending procedures. The result
ceive the funds or the willingness and/or ability of of SBA’s testing for 7(a) and 504 guaranties issued
the borrower to repay the disaster loan. The SBA in FY 2009 indicated a zero percent improper pay-
has instituted additional training to ensure that ment rate for both programs. The SBIC program
staff is aware of all paperwork requirements and testing found one potential error that resulted in
the proper steps to be taken to waive requirements an improper payment rate of 1 percent or $20.4
when appropriate. Additionally, a new quality million when extrapolated. The financing in
assurance team reporting directly to the Disaster question contained a pre-payment penalty that, in
Headquarters office is being assembled to provide the judgment of the reviewer, was excessive. Pre-
an independent review of the disaster processing payment penalties are permitted so long as they are
center. The improper payment review will then not deemed excessive. This potential error could
be completed more frequently than annually, al- yet be justified by the SBIC licensee.
lowing corrective actions to be implemented in a
timely manner. In summary, an Inspector General audit has
altered SBA procedures for sampling and testing
In accordance with OMB guidance, the SBA improper payments, as well as improper payment
includes loan guaranty approvals issued during FY results, in the 7(a) guaranty purchase and Disaster
2009 in its Improper Payment program reporting loan programs. The SBA continues to work with
for its 7(a), 504 and SBIC programs. Although the Inspector General to resolve issues related to
these guaranties haven’t yet resulted in federal out- this OIG audit. Finally, the SBA is committed to
lays, they could possibly in the future, and they are continuous improvement in its improper payment
therefore included. Most frequently, the reason controls and monitoring.
Did The Office of Government Contracting and Business Development launched an
you on-line training course for small businesses to learn how to participate in the
know federal procurement arena– http://www.sba.gov/training/governmentcontracting.
Agency Financial Report FY 2009
29
M ANAGE MENT’ S DISC U SSION & AN ALYS I S
Other Management Information
Summary Performance Information indicators have been included to illustrate the
on Key SBA Programs impact of other SBA programs and to highlight
The following table presents key SBA performance the soundness of SBA’s financial systems. Detailed
data. The first three programs - 7(a), 504, and performance information on all SBA programs
Disaster loans - are the three largest SBA guaranty will be presented, and all variances explained, in
and direct loan programs and make up the bulk the FY 2009 Annual Performance Report which
of SBA’s loan portfolio. The other performance will be submitted February 2, 2010.
Strategic Goal 1 - Expand America’s ownership society, particularly in underserved markets
Type of FY 2006 FY 2007 FY 2008 FY 2009 FY 2009 FY 2009
Program Performance Indicator
Indicator Actual Actual Actual Goal Actual Variance
7(a) Small Businesses Assisted (#) (1) (2) Outcome 80,303 84,666 59,019 60,486 39,698 -34%
R
7(a) Jobs Created/Retained (#) (2) Outcome 705,481 776,729 586,955 925,493 450,101 -51%
R
504 Small Businesses Assisted (#) (1) (2) Outcome 7,569 9,708 8,084 8,185 6,321 -23%
R
504 Jobs Created/Retained (#) (2) Outcome 118,840 126,069 111,996 158,122 74,849 -53%
R
Strategic Goal 2 - Provide timely financial assistance to homeowners, renters, nonprofit organizations and businesses affected by disaster
Disaster Disasters having field presence within 3 days (%) Output 100% 100% 100% 95% 100% 5%
G
Disaster Time to process 85% of business physical Output 66 11 11 18 14 22%
applications (days) G
Strategic Goal 3 - Improve the economic environment for small business
Advocacy (2) Regulatory Cost Savings to Small Businesses Outcome 7.25 2.60 10.76 5.5 7 27%
($ in billions) (3) G
Stratgic Goal 4 - Ensure management and organizational excellence to increase responsiveness to customers, streamline processes, and improve
compliance and controls
Financial Unqualified Opinions for Audit Year Outcome Yes Yes Yes Yes Yes 0%
Reporting
G
Actual results meets or exceeds target
G
Actual results is within 10% of meeting the target
Y
R Actual results is less than 90% of target
1
FY 2006 totals only include data for existing businesses. Start-up businesses were not included. Starting in FY 2007, all small businesses assisted are included.
2
A more precise mehtodology was developed in FY 2009 to calculate “Jobs Created/Retained”, “Small Businesses Assisted”, and “Underserved Markets-
Small Businesses Assisted”. In addition to the change in methodology, the figures are net of fully cancelled loans. Prior year results have been restated to
reflect this change.
3
The FY 2009 “Actual” will be finalized in February 2009 in Advocacy’s annual report to Congress.
Agency Financial Report FY 2009
30
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