THE OFFICE OF ADVOCACY U.S. Small Business Administration Background Paper on the Office of Advocacy 1994 - 2000 November 1, 2000 FOREWORD This document discusses the statutory mandates and work of the Office of Advocacy. It was reviewed by the entire Advocacy staff to ensure accuracy, thoroughness and objectivity. The report summarizes what has transpired during the past seven years under the current Chief Counsel (1994-2000) and the impacts Advocacy's work has had on public policy initiatives. It includes commentaries on issues that are still pending which may need to be addressed by the Chief Counsel some time in the future - issues that are either legislative, regulatory, administrative or research related. We hope the material provided encompasses enough information about the Office of Advocacy, its work and its mission to be useful in developing guidance for the future. Jere W. Glover Chief Counsel for Advocacy November 1, 2000 TABLE OF CONTENTS Foreword Table of Contents INTRODUCTION Are Small Firms Important? Congressional Response to the Question Mission of the Office of Advocacy The Public Policy Information Challenge THE ROLE OF DATA AND RESEARCH Advocacy's Research Mandates Small Business: Its Role in the Economy, in a Nutshell Research - Generic and Specialized Advocacy: The Source of Generic Data on Small Business Database Uses - Published Reports Issue-Specific Research Research Impact on Public Policy Conclusion THE IMPACT OF THE REGULATORY FLEXIBILITY ACT Introduction The Role of the Office of Advocacy SBREFA and Judicial Review Regulatory Review Processes Regulatory Savings Conclusion THE PUBLIC POLICY ROLE OF SMALL BUSINESS STAKEHOLDERS Introduction White House Conference on Small Business Industry Roundtables Small Entities and SBREFA Panels State Conferences Small Business Week Communications Services Conclusion PENDING ISSUES Introduction Research Regulatory Development Certification Direct vs. Indirect Costs (Regulatory Flexibility Analyses) Legislative Issues Administrative Issues THE NEW ECONOMY Introduction Advocacy Initiatives Conclusion CONCLUSION Advocacy as an Independent Entity within SBA History is Prologue Appendices Statutory Authority for the Office of Advocacy The RFA as Amended by SBREFA Examples of Policy and Administrative Changes Proposed or Supported by Advocacy Chief Counsel for Advocacy Independent Positions Before Congress List of Testimony by Current Chief Counsel Current Staffing of the Office of Advocacy and Organizational Chart Research Reports and Publications, 1994-2000 Memorandum of the Chief Counsel on PRO-Net, February 20, 1998 Staff Organization by Issue RFA Court Decisions SBREFA EPA and OSHA Panels through FY 2000 Regulatory Cost Savings, 1998 Legislation Implementing Recommendations of the 1995 White House Conference on Small Business List of Advocacy Sponsored Research Still Pending Rules Awaiting Final Action Suggested Budget Line Item Chronology of Memoranda on Chief Counsel's Amicus Curiae Authority June 1999 Memorandum on Ombudsman Function Office of Advocacy Employees - Headquarters, 1991-2000 Memorandum: Contributions of Small High Tech Firms to The New Economy Special 20th Anniversary Edition of the Small Business Advocate INTRODUCTION Are Small Firms Important? The answer to this question provides the rationale for why the Office of Advocacy was established by Congress in 1976. The question must also be answered whenever voice is given to small business issues in policy deliberations. A book commissioned by the Office of Advocacy specifically asked academic experts to develop their own responses.(1) In the book's Preface, the Chief Counsel pointed to the stream of visitors to the United States from countries ".struggling to get their economic feet on the ground."(2) What these visitors want to know is why small business and entrepreneurship thrive in the United States. The answer is both simple and complex. The simple answer is that the United States is committed to preserving competition. Competition keeps capitalism efficient and fosters innovation. Small business is the source of competition. "Preserving competition" then means that the birth and growth of small business should be encouraged and that anti-competitive practices or barriers that harm small business' development and growth must be discouraged. Therein lies the complexity. Congressional Response to the Question The national commitment to healthy competition is reflected in the laws, enacted at different times in our history, to outlaw anti-competitive practices: the Sherman Antitrust Act, the Clayton Act, the Federal Trade Commission Act and the Robinson-Patman Act. These laws focus on punishing anti-competitive practices or defining what practices are illegal. The Small Business Act. Congress recognized, however, that there is a role for government in addressing problems that do not emerge as the result of illegal conduct but nevertheless exist, and that cannot be addressed by the marketplace itself. In 1953 Congress passed the Small Business Act to address imperfections in financial markets that erect barriers to small business growth. The following is taken from the Act's preamble: The essence of the American economic system of private enterprise is free competition. Only through full and free competition can free markets, free entry into business, and opportunities for the expression and growth of personal initiative and individual judgment is assured. Such. well being cannot be realized unless the actual and potential capacity of small business is encouraged and developed.(3) The Office of Advocacy. Later, Congress recognized that small business needed a voice in policy deliberations that included but also transcended financial issues to offset that of the lobbyists for large business. Congress established the Office of Advocacy in 1976 within the U.S. Small Business Administration to be an independent voice for small business in the formulation of public policy across the entire federal government.(4) The Office is headed by a Chief Counsel appointed by the President from the private sector and confirmed by the Senate. The duties assigned to the Office are several, among which are (1) generating research on small business trends, characteristics, and contributions to the economy (Appendix A),(5) and (2) monitoring agency compliance with the Regulatory Flexibility Act (RFA),(6) as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA).(7) (Appendix B) Specifically, one of the Office's primary functions is to: [E]xamine the role of small business in the American economy and the contribution which small business can make in improving competition.restraining inflation, spurring production, expanding employment opportunities, increasing productivity, promoting exports, stimulating innovation and entrepreneurship, and providing an avenue through which new and untested products and services can be brought to the marketplace.(8) (Appendix A) With this mandate, the Office of Advocacy was, in effect, made a partner of other Federal agencies, such as the Federal Trade Commission (FTC) and the Department of Justice (DOJ), with different but complementary responsibilities to preserve competition. The main difference in the mandate given to the Office of Advocacy as compared to that given to the FTC and the DOJ is that it is expected to be proactive - not proscriptive. It is to identify market imperfections that harm small business, find solutions, suggest public policy initiatives to help small business, ensure that public policy fosters competition rather than erect barriers, and represent small business interests in public policy deliberations.(9) Thus, the Congressional response to the question, "Are Small Firms Important" clearly has been and continues to be "Yes." Mission of the Office of Advocacy: Consensus at Both Ends of Pennsylvania Avenue Being an effective spokesperson for small business means being politic but not partisan. Effectiveness is measured by how often consensus is achieved at both ends of Pennsylvania Avenue - how often issues are brought to closure with workable solutions. Policymakers at both ends of Pennsylvania Avenue must have assurance that the information provided by the Office of Advocacy is the best available, is impartial and can withstand scrutiny. Some issues take years to resolve and persist beyond changes at 1600 Pennsylvania Avenue and in the U.S. Congress.(10) In such circumstances, the Office, to maintain its credibility, has had to remain faithful to small business concerns, regardless of where the initiative for change rests - be it with the Congress or with the Administration. Establishing credibility with the Executive Branch is helped by the Office of Advocacy being part - but independent - of the Administration. To the extent Advocacy can establish its impartiality and objectivity, it can be guaranteed early access to policymakers at the highest levels in the Executive Branch.(11) Confidence in Advocacy's ability to speak objectively on behalf of small business poses no risk to the Executive Branch since Advocacy provides information needed to formulate sound public policy. As such, objectivity is a potent force in ensuring responsiveness on the part of the Executive Branch to any Advocacy recommendations - so that Advocacy is not just being heard - it is being listened to. Because of the credibility it has established, Advocacy can be, and has been, proactive in initiating several discussions on recommended policy changes as well as regulatory changes. (Appendix C) As for Congress, it needs to be assured that information being provided by Advocacy is consistent with what is being provided to the Administration; that the information is objective; and that Advocacy is truly speaking for small business. Given shifting political sands, Congress needs constant assurance that Advocacy is not being partisan. Independence - Advocacy's Hallmark. To guard against undue partisan influence, the Office of Advocacy has been empowered by Congress to be an independent voice for small business. Nevertheless, since the Chief Counsel is a presidential appointee, some have expressed skepticism about the Chief Counsel's independence. Skepticism is kept at bay by the Chief Counsel working impartially with both the Majority and the Minority. Doing so reinforces the concept that small business issues and the preservation of competition are not partisan issues, as evidenced by initiatives undertaken by both Democratic and Republican Administrations. Achieving consensus at both ends of Pennsylvania Avenue takes time. With this in objective clearly in mind, the current Chief Counsel has disagreed publicly with both the Administration (Appendix D), and the Congress (Appendix E), when it was deemed to be in the best interests of small business to do so in order to move both branches closer to consensus. No Clearance. To this end, the Office of Advocacy does not clear the following with the SBA Administrator or the Office of Management and Budget (OMB) prior to publication: Y testimony Y reports to Congress (with one exception)(12) Y comments on regulatory proposals Y comments on legislation Y publications Y press releases Y web-site material Public Law Hiring Authority. To ensure that the staff of the Office has the skills to represent small business on any public policy issue, Advocacy staff is hired without regard to civil service competitive requirements or White House clearance.(13) (See Appendix F for current staffing.) This flexibility allows the Chief Counsel to change the professional mix of the staff as dictated by trends in the economy or changes in regulatory/legislative priorities. Policy Initiatives Need Rapid Response. In order for Advocacy to be an effective spokesperson for small business, it must respond quickly to emerging issues; it has to get to the top of the learning curve rapidly. "Quick response" has often meant action within 24 or 72 hours in response to initiatives of other entities, primarily the Congress and regulatory agencies. This modus operandi is not expected to change in the near term. Advocacy also has a proactive role - that of being on the cutting edge of economic trends. Research data drives Advocacy's proactive role and helps it identify emerging problems, construct/suggest/pilot test programmatic solutions - but not manage programs over the long term. The Public Policy Information Challenge This document started with the question: Are small firms important? While we believe the answer is obvious and well documented in industrial organization economic literature, two barriers exist of which Advocacy staff need to be mindful when analyzing public policy impacts on small business: Barrier No. 1. Not all policy makers understand or accept the important role played by small business in maintaining competition. Too often they are familiar only with the literature produced by business schools and research that addresses big business issues. The adverse long term impacts of industrial concentration on price, innovation and choice are not readily understood. This means that Advocacy constantly has to provide information to policymakers on the truisms of small business economics and the positive effects small business has on the structure of the U.S. economy. And, since the universe of policymakers is constantly in flux in both the legislative and executive branches of government, there is always a new group of policymakers in need of the information. Overcoming this information gap is essential if small business reforms are to be accepted and implemented. Barrier No. 2. Laws to ensure a level playing field for small business (e.g., the RFA) are often interpreted by some policymakers as establishing special treatment for small business at the expense of other important public policy concerns. However, the art of governance is the ability to strike a workable balance among various national goals, and not just focus exclusively on statutory or agency- specific goals to the exclusion of other national objectives. As applied to small business, this means that policymakers and regulators are obligated to find ways to avoid anti-competitive or inequitable impacts on small business without compromising the specific public policy agendas assigned to them by Congress. This concept needs to be re-enforced constantly in order to gain support for Advocacy positions or recommendations on public policy. The foregoing has described the legal and policy underpinnings of the Office of Advocacy. It forms the backdrop for what the Office of Advocacy has done during the tenure of the current Chief Counsel. The material that follows discusses: Y the role of data and research Y the impact of the regulatory flexibility act Y the public policy role of small business stakeholders Y pending issues Y the new economy The document concludes with a discussion of the issues that are likely to emerge in the coming months and the work that Advocacy has already done on some of them. THE ROLE OF DATA AND RESEARCH "Information Rationalizes Markets" - Tibor Skitovsky Advocacy's Research Mandates For over one hundred years, Congress has re-affirmed through its legislative decisions that a vibrant small business community is essential to a dynamic economy. National policy has consistently treated small business as the engine that drives competition. When Congress created the Office of Advocacy it assigned to it the following major research responsibilities (paraphrased from the enabling legislation; see Appendix A for complete text) (14) Y examine the role of small business in the American economy and the contribution which small business can make in improving competition Y measure the direct costs and other effects of government regulation on small business Y determine the impact of the tax structure on small businesses Y determine the financial resource availability and alternative means to deliver financial assistance to minority enterprises, including methods for securing equity capital Y provide information on the status and potential for development and strengthening of minority and other small business enterprises Y identify and describe those measures that create an environment in which all businesses will have the opportunity to compete effectively Y ascertain the common reasons for small business successes and failures Small Business: Its Role in the Economy, in a Nutshell It is estimated that there were 24.8 million firms in the U.S. in 1999 (based on business tax returns), which employed over 117 million people. Of those firms, 99.9% were small businesses with less than 500 employees, and they employed 56.5% of the nation's private sector workforce. Nearly half (47%) of all sales revenues in the nation come from small firms. Small firms contributed 52% of non-farm Gross Domestic Product (GDP) in 1992. With only the smallest number of exceptions, America's large businesses began as small businesses. Most net new jobs have been created by small firms - at least 75% during the decade of the nineties. Research - Generic and Specialized The foregoing are generic data developed by the Office of Advocacy and are updated annually. They have become ingrained in the nation's rhetoric. They have been used in State of the Union addresses; in speeches by congressional leaders; by the Administrator of the SBA; and by the media such as Entrepreneur and Inc. magazines and The Wall Street Journal. Yet, despite the graphic picture they draw of small business' role, total acceptance by policy makers of the importance of small business to the economy remains elusive. The importance of small business is always being challenged. The question always has to be answered anew: Are small firms important?. Is the problem one of image? Does the phrase "small business" automatically conjure up images of local dry cleaning establishments, fast food franchises, auto repairs shops, florists, travel agencies, liquor stores, Laundromats, gas stations - and nothing more? What about small community banks, small venture capital funds, biomedical firms, computer software design firms, safety engineering firms, wireless telecommunications providers, auto parts manufacturers, small oil refiners, chemical producers, wastewater treatment facilities, etc.? These are all industries where small firms are thriving, in some cases, struggling and are all affected by public policy. Or is the problem small business' relative invisibility in the governmental arena? Their lack of high paid lobbyists? Their limited resources to monitor and participate in public processes? It is easy for Fortune 500 companies to access congressional or regulatory agency offices. Their well known corporate identities open doors. But, while small businesses can and have been visible on some issues, such as tax deductibility for health insurance premiums for the self-employed, it is not that easy, say, for a small tool and die manufacturer to get a hearing on new mandatory laboratory testing protocols established by the National Institutes of Science and Technology (NIST). The challenge then is to document - to draw the "big picture" of small business' role in the economy in global terms. It is important to know exactly what the percentage of small firms is in the overall economy. It is also important to know how many people small businesses employ; what percentage of the GDP they contribute; and how many net new jobs small businesses develop. The generic data can also document in which industries small business growth is occurring and geographically where the growth is changing. Without this data, the question of small firm importance cannot be answered, particularly as the structure of the economy shifts. When there are downturns in the economy or when there is a credit crunch, this data become particularly important in determining the steps to be taken to avoid disastrous consequences for this sector of the economy and for the economy as a whole. Advocacy: The Source of Generic Data on Small Business Advocacy funds the publication of most of the small business data in the federal government. If it were not for the Office of Advocacy, there would be no small business data to influence, shape, or alter public policy. Nor would there be any impartial data to measure the impact of public policy on small business or how public policy should be altered. Because Advocacy's economic research mandate is both broad and unique, the data it has generated is in wide demand, as measured by the numerous and constant data requests Advocacy receives on a daily basis. The data sources developed or funded by the Office of Advocacy are as follows: Y Statistics of U.S. Businesses (SUSB). This database has been constructed at the U.S. Bureau of the Census with funding from the Office of Advocacy to generate data on an annual 4-digit SIC basis. The beauty of this database is its flexibility. It can be used to document trends. It can also be used to measure accurately the number of firms and employees affected by particular regulatory or legislative proposals (e.g., the ergonomics rule of the Occupational Safety and Health Administration (OSHA); changes in the minimum wage; Americans With Disabilities Act). It cannot, however, estimate the cost of regulations. Other complementary research is needed to measure regulatory costs. Y IRS Based Data. With funding from the Office of Advocacy, the Statistics of Income Division of the Internal Revenue Service produces annual data by gender on the number of proprietorships, receipts, net income and broad breakdowns of the data by industry and geographical regions. Recently, the data has been expanded to provide information on male and female sole proprietors in the most common business sectors, in the most populous states, in different size classes for receipts and net income. Y Entrepreneurial Research Consortium Data. The Consortium gathers the most extensive set of information available anywhere about "nascent entrepreneurs" - those in the process of starting a business. It is a voluntary association of universities, research organizations and foundations, 20 of which are located in the United States and 10 located abroad. The Office of Advocacy has been the only federal government member of the ERC since its founding in 1995. Some 100 researchers are beginning the process of examining the data from almost a thousand interviews of entrepreneurs to see why these individuals start businesses. Researchers and the government are interested in learning what motivates someone to take the risk to start a new buisness. Finally, a new database, Y Business Information Tracking Series (BITS). This is a new database constructed at the request of and funded by Advocacy within the past two years. Data in this Census Bureau series traces the growth of firms with employees over time. This database helps identify which types of jobs come from new small firms, how long they last, and how both existing and new firms contribute to the growth of particular industrial sectors. The data has been particularly helpful in analyzing growth in rural areas where almost all firms are small businesses. This new database finally helps address the question: what happens to specific firms over time - year to year. (Note: Firm identities are kept confidential.) It provides data on the dynamics of small business growth rather than just providing a snapshot of what exists at a point fixed in time. Database Uses - Published Reports(15) The SUSB database is available on Advocacy's web site at www.sba.gov/advo/stats. The ready availability of this data on the Internet is intended to encourage more use by researchers and the media, as well as by policymakers. Reports have been developed from these generic databases and have been published annually by the Office of Advocacy. Y State of Small Business: A Report of the President. This is an annual report mandated by law(16) that has developed an international reputation for its depth of information, statistical appendices on federal procurement and minority and women-owned firms. It contains discussions of topical issues such as The White House Conference on Small Business: Implementing the Recommendations (1996 Report); Financing Small Business (1997 Report- which also included a discussion of Venture Capital Funds); New Data for Analysis of Small Business Job Creation (1998 Report); and The Regulatory Flexibility Act Is Changing the Culture of Federal Agencies (1999 DRAFT Report) Y Small Business Economic Indicators. This booklet brings together all of the available information on small business formation and dissolution, income, and self- employment, as well as the number of firms by state. The data is useful to state and local economic development officials, marketing departments, demographers and nearly every congressional office interested in the economic health of their state. Y State Small Business Profiles. These three-page summaries provide, on a state-by-state basis, a concise summary of the leading small business job creating sectors. They also include the latest data on women- and minority- owned firms and on the top banks making loans to small business. In addition, information is provided on the top five sectors with the most small business jobs. Detail is also provided on small business income growth. These profiles are in demand in part because they are concise snapshots that can be easily quoted in the business pages of local newspapers and for speeches. Issue-Specific Research The data discussed in the preceding, as important as they are, nevertheless have limitations. They do not provide data on: Y small business' share of federal procurement Y the cost of regulations Y how small business meets and survives competition from large companies Y the impact of mergers on the growth or terminations (as opposed to failures) of companies Y the small business lending patterns of all banks Y how small businesses are using or being harmed by the competition posed by the Internet Y barriers to the development of employee benefit plans in small business Y the differences in health coverage and charges made to small business by HMOs Nor can the data tell us how small businesses grow or what barriers are hindering growth. All these issues require specialized research in order to assess what the role of public policy should be and to answer questions from the Administration, the Congress and the small business community. The need for this specialized research is implied in the research mandates given to the Office of Advocacy by Congress. Some of Advocacy's research mission has been established by statute with some specificity, such as analyzing financial markets and assistance to minority enterprises, availability of equity financing, tax provisions that help or harm small business, etc. Since these are fundamental issues, Advocacy has conducted or sponsored research on a somewhat regular basis to monitor trends and to identify possible new barriers. Financial Markets. Advocacy has spent a good deal of effort analyzing and reporting on financial market imperfections. 1. Bank Lending Studies. During the past five years, Advocacy has published reports analyzing the small business lending patterns of banks on a national and on a state-by- state basis. National and state rankings have been developed using information furnished by banks to bank regulators. This information is public but had never been used in a manner useful either to banks or small business. The studies provide a compilation and analysis of the information that the market could not generate on its own and have, therefore, been of significant interest to the media, both national and local.(17) Informal feedback from banks indicate that the information is indeed being tracked by banks and that they are relying on it to increase market share, namely competing for business from small businesses. The same data have been used to produce reports on bank holding company lending patterns to small business and patterns in micro lending (loans of less than $100,000). 2. National Survey of Small Business Finances. Advocacy has helped fund this survey conducted by the Federal Reserve in 1988, 1993-94 and 1998-99 of 4,000 nationally representative firms that documents how small businesses finance their operations. It documents the extent of the use of credit cards for business purposes and shows by race and gender the amounts borrowed, the balances carried and who has been denied credit. This important information identifies barriers to competitive financing for small firms. 3. Consumer Finance Survey. Advocacy also worked closely with the Federal Reserve on this survey of personal finances of American families that is conducted every three or four years. Holdings of all forms of assets, including ownership of private businesses, and liabilities are identified. This data can be used to estimate how many high net-worth families are business owner-managers and/or angel investors. The database is currently being analyzed by Professor George Haynes of Montana State University, under a contract with the Office of Advocacy, to study the characteristics of business owners and the self-employed. 4. Impact of Bank Mergers on Small Business. Within the past 5-10 years there has been an increased number of bank mergers. How this trend is changing the structure of the industry, altering credit scoring practices and affecting credit availability for small business are questions that cannot await research. The need for information is immediate. Advocacy has sponsored two conferences that brought leading scholars together to discuss how the structural changes in the industry may be hurting the ability of small firms to secure loans. Nearly all presenters confirmed that concern is warranted and that the trend needs monitoring. Several, however, struck an optimistic note that community banks will survive because they serve very different markets than large banks. Procurement. The U.S. Government spends billions of tax dollars procuring goods and services from the private sector. How the Government spends those dollars can influence the structure of the economy. The question is: are government expenditures of tax dollars increasing industrial concentration, or are tax dollars being marshaled to ensure competitive markets? If ensuring competition is one of the goals of government procurement, then there need to be policy directives to this end. Government procurement is a great business opportunity for small business. With more and new potential suppliers, government in the long run will pay less and get more for each tax dollar expended. In recent years, however, policy makers have been trying to find ways to reduce the operating costs of government contracting. Reforms have been initiated by both the Administration and the Congress to make contracting more efficient. Contracting officers have been given greater discretion in contract awards. At the same time, the number of contracting officers has been greatly reduced. Advocacy, while supportive of the overall objective of increasing efficiency, resisted many of the specific reforms. In the end, however, operating efficiency reforms won out over "open competition" procedures that would have helped small business. Advocacy has continued to monitor the impact of the reforms on small business and here are some of the results of its research. 1. Contract Bundling. Contract bundling is the grouping of contracts into one large contract. Studies done by Advocacy within the last three years show that bundling is effectively eliminating the ability of many small firms to bid successfully on such contracts as prime contractors. Advocacy has documented that there is an increased tendency to bundle contracts and that it appears to be harming small firms.(18) 2. Data on Procurement Centers. Data was collected on the dollar value of contracts awarded to large and small firms by each of the federal procurement centers located throughout the United States. The data is not conclusive on the value of contracts awarded locally to small firms since several of the centers finance contracts outside their districts (e.g., a military base which purchases goods and services from all over the country). Nonetheless, this was the first study of its kind and did provide some insights on the decisions of the procurement centers.(19) Job Generation. There has been considerable debate over how many net new jobs are created by large business as compared to those created by small business. Until the development of the Business Information Tracking Series (BITS), the debate persisted because the only "dynamic" data available was on the manufacturing sector. The data on the rest of the economy only provided the equivalent of a snapshot of what existed at a particular point in time and did not document individual firm growth over time. As long as there was no database that could track the growth of small firms, monitoring how they grow, when they hire and add new employees, or when they no longer can be considered small business, gaps in the data were used to refute claims about the net new jobs being created by small firms. Using BITS and the annual updates to the data, Advocacy is now able to demonstrate the role of small business in creating jobs. The new BITS file is filling the data gap and putting the debate to rest. 1. Survival of Minority and Women-Owned Firms. The BITS database has been used to study the survival rate of women- and minority-owned firms.(20) These studies document survival rates and demonstrate the enormous potential the BITS database offers for understanding the dynamics of the U.S. economy. 2. Mergers and Acquisitions in the United States. A recent Advocacy study(21) showed that the merger of two small firms frequently resulted in the creation of new jobs, while the merger of two larger firms frequently had the opposite effect. When a small firm was acquired by a large firm, jobs may or may not have been created, depending on a host of variables. And, finally, 3. Job Creation by Small Firms. Several recent studies authored or sponsored by the Office of Advocacy have finally resolved the age-old question: what percentage of new jobs is created by small firms, and how long do they last?(22) These studies, using the BITS data base and employing a variety of different methodologies, show that, over a 4-5 year period, about three-fourths (75-80%) of new jobs have been shown to come from small firms. About 30-40% of these new jobs have come from the births of new firms and 60-70% from rapidly expanding "gazelle" firms.(23) Additional Advocacy-Sponsored Research. Each year Advocacy solicits proposals from independent researchers - all small businesses - on a variety of issues. Some of this research has been cited in the preceding section, e.g., research on contract bundling. There have been other interesting research results from work performed under contract with the Office of Advocacy. The research is also issue-specific but extremely diverse and addresses issues that do not necessarily require constant monitoring such as the research already discussed on Financial Markets, Procurement or Job Generation. Some of the more recent research include: Small Business and Access to Health Insurers, Particularly HMOs, Consult, Inc, Orangeburg, South Carolina (September 2000). This study examined the multitude of state laws and regulations covering health plans that insurers must offer to small employers, surveyed insurance companies in 10 states to learn their actual practices, and interviewed a variety of small businesses in one state to document their perception of the information and insurance policies that are, in fact, available to them. Developing High-Technology Communities: San Diego, Innovation Associates, Reston, Virginia (April 2000). This report describes the individuals, institutions and processes that transformed San Diego's declining defense based economy to one that boasts numerous clusters of locally based, mostly small, high-technology businesses in several fields. Lessons learned will be useful to other communities. Small Business Survival in Competition with Large Multi-Unit Retail Firms, Jack Faucett Associates, Bethesda, Maryland (January 2000). Included in this study is an examination of the impact of the Internet and other technological developments on retail booksellers. The data has implications for other retail sectors. Homebased Business: The Hidden Economy, Joanne H. Pratt, Dallas, Texas (August 1999). This report provided a detailed portrait of home-based businesses and their owners. Home-based business data are then compared to non-home-based firms, using special tabulations from the 1992 Characteristics of Business Owners survey. In brief, the data document significant growth in this sector. Retirement Plan Coverage in Small and Large Firms, David Kennell, Arnold Brooks, and Terry Savela, Lewin-ICF (1992). The research documented the reasons for the low level of pension coverage for employees of small firms, most of which have since been used to justify changes in pension tax laws and regulations. A complete list of reports on Advocacy research produced during the past seven years can be found in Appendix G. Research Impact on Public Policy The ultimate test of the value of Advocacy's research is the knowledge it contributes to the body politic. Another test is how it has been used to shape public policy. Much of the foregoing discussion of data helps answer the question: Are Small Firms Important? But there is other research that has had a direct impact on Administration initiatives, legislation or regulatory design. The following illustrates how research has influenced and shaped public policy initiatives and reforms. Equity Markets - ACE-Net. Advocacy research documented that the equity marketplace was not meeting the needs of small business. Small businesses had difficulty raising equity capital in amounts between $250,000 and $5,000,000. The existing institutional venture capital fund market was not investing at these levels. At the same time, the experience of Small Business Investment Companies (SBICs) was, and continues to be, that they cannot fund all the worthwhile applications they receive. The equity funding gap is aggravated by the fact that the average investment in a company by venture capital firms is now approaching more than $14 million. "Angel" investors (private accredited individuals), who are an alternative investment source, are not an easily identifiable group of investors. They cherish their anonymity and cannot be approached directly by small firms. Another factor that contributes to the inefficiency of this market is the cost of negotiating an investment agreement. Accountant and lawyer fees can amount to 20% of the total dollar investment covered by an agreement. This is because each agreement is custom-designed, despite the existence of somewhat standard terms and conditions found in nearly all such agreements. The solution constructed and funded by the Office of Advocacy is called ACE-Net, an acronym for Access to Capital Electronic Network. Funding for ACE-Net started in 1996. It is an Internet-based securities listing service managed by 63 operators in 45 states, the District of Columbia, and Puerto Rico.(24) The network operators are nonprofit, university- or state-based entrepreneurial development centers. They mentor small businesses and help them develop business plans and marketing strategies. Companies ready to seek equity capital can then list their securities offering on the Internet service. The centralized database is located and secured by the University of New Hampshire, Whittemore School of Business and Economics. "Angel" investors, wherever located, can obtain secured passwords for a nominal fee structured to cover administrative costs. The passwords give them access to the system to identify investment opportunities. These investors can then contact and negotiate investment agreements outside the system (off line) in accordance with applicable state securities requirements. Currently, there are approximately 340 active investors and an additional 735 new investors to whom passwords have been issued. There are 234 active companies using the system to list their equity needs. Another 912 companies have enrolled with ACE-Net, evidence that the pool of potential investment opportunities is expanding. The service is now reaching a critical mass. Because of this momentum, it is estimated that approximately $1 billion has been raised by companies through ACE-Net and through the network operators largely within the past few years. This new Internet-based service received a "no action" letter from the staff of the Securities and Exchange Commission (SEC). The legal impact of this letter is that, as designed and as long as the program operates under conditions specified in the letter, ACE-Net does not violate federal securities laws. As for state securities laws, 40 states have adopted the Model Accredited Investor Exemption (or variations thereof) developed by the North American Securities Administrators Association (NASAA). This accredited investor exemption is based on the premise that accredited investors are capable of undertaking their own due diligence and gauging the risk factors before making any investments. Significantly, these exemptions reduce some of the state regulatory hurdles investors and firms would otherwise have to overcome and are helping to establish uniformity among state securities laws for the small business sector without increasing investor risk. From the very beginning, it was never intended that ACE- Net would be a government program. Advocacy's role was to be a catalyst in constructing a "fix" for the small business equity gap. Advocacy's involvement, and that of the government, would eventually cease once the service was operational and could be moved to the private sector. Federal seed money has been used to stimulate the development of a national investment market to meet the needs of small firms that the existing market could not accomplish on its own. Explorations are currently underway to privatize the entire Internet service in the near future. What Advocacy did in this instance was identify a market imperfection that the market could not address, craft a solution and test it. Advocacy is now working to pass it on to the private sector to underwrite and manage. More information about ACE-Net can be found on its web site at www.ace-net.org. Procurement - PRO-Net. As discussed earlier, procurement reforms have introduced procedures that in many instances are harmful to small business. An objection often raised by contracting officers is that they cannot find small firms with the expertise or competence to bid on government proposals. To overcome this objection, PRO-Net was designed and tested by Advocacy. Like ACE-Net, PRO-Net is an Internet-based service that lists profile information on over 200,000 small firms interested in obtaining government contracts. The electronic profile of each registered small business includes the identification of the business, organization/ownership, products and services, and performance/history. A key feature of the system is that participating firms can continually update their profiles with the most current information on their companies, new products and services. PRO-Net has links to information on both public and private contract opportunities and can be used by contracting officers in both the public and private sectors to find qualified vendors. PRO-Net was modeled after the computer program developed for ACE-Net. Advocacy funded the original design and tested its feasibility. It has now become a fixed program within the SBA to help the agency fulfill its mandate to monitor federal agency goals for awarding contracts to small business.(25) Bankruptcy Reform. In recent years there has been a great deal of congressional interest in reforming the bankruptcy laws to address the backlog of cases pending in the courts. Research by the Office of Advocacy demonstrated that small businesses account for only a very small percentage of all bankruptcies filed each year, and that small business debtors have not imposed a critical burden on the bankruptcy system. Working with both the U.S. House of Representatives and the U.S. Senate, Advocacy succeeded in preserving some of the flexibility that exists in current law for small business. Specifically, the Office of Advocacy was successful in adding a provision in the Bankruptcy Reform Act of 2000 that would provide an extension of time (up to 90 days in the House-passed version and up to 300 days in the Senate-passed version) for small businesses to file reorganization plans with the bankruptcy courts. Final action on this bill has not been taken by the Congress as of this date. This is a difficult issue on which to achieve consensus since there are small business debtors as well as small business creditors, including the SBA itself. Cost of Regulations. At the direction of Congress, the Office of Advocacy prepared a report in October 1995 on The Changing Burden of Regulation, Paperwork, and Tax Compliance on Small Business: A Report to Congress. The report was based on research funded by Advocacy under a contract with Thomas D. Hopkins of the Rochester Institute of Technology.(26) The research confirmed the original premise of the RFA namely, that small firms suffer a disproportionate impact from federal regulations. The data in the report show that small firms with fewer than 20 employees pay 40% more than large businesses per dollar of sales; or, measured differently, 33% more than large businesses per employee. The data generated by this research has been widely used by congressional leaders. While there is no evidence to make a direct connection between this research and legislative reforms, we suspect that the information on regulatory costs was influential in Congress' decision to require EPA and OSHA to convene Small Business Advocacy Review Panels(27) prior to publishing a rule for public comment. Follow-on research funded by Advocacy includes Impacts of Federal Regulations, Paperwork, and Tax Requirements on Small Business(28) and projects currently being conducted by CONSAD, Inc., Management and Planning Corp., and an update by Hopkins and W. Mark Crain.(29) Conclusion The role of research and data cannot be overstated. Information rationalizes markets. It also rationalizes government decisions, as evidenced by the foregoing. In addition, data and regulatory impact analyses performed by Advocacy staff and its contractors have also played a major role in analyzing the small business impacts of regulations, leading to almost all of the regulatory reforms discussed in the following chapter. THE IMPACT OF THE REGULATORY FLEXIBILITY ACT(30) "Information Rationalizes Public Policy" - Anon. Introduction In 1980, Congress enacted the Regulatory Flexibility Act (RFA) with a mandate that federal regulatory agencies analyze the impact of their regulations on small entities and consider alternatives that would be equally effective in achieving public policy goals without unduly burdening small entities. In passing the law, Congress made several findings that are consistent with other congressional mandates regarding the preservation of competition. They are: 1. when adopting regulations to protect the health, safety and economic welfare of the nation, Federal agencies should seek to achieve statutory goals as effectively and efficiently as possible without imposing unnecessary burdens on the public 2. laws and regulations designed for application to large scale entities have been applied uniformly to small businesses. even though the problems. may not have been caused by those smaller entities 3. uniform Federal regulatory and reporting requirements have in numerous instances imposed unnecessary and disproportionately burdensome demands. upon small businesses. 4. the failure to recognize differences in the scale and resources of regulated entities has in numerous instances adversely affected competition in the marketplace, discouraged innovation and restricted improvements in productivity 5. unnecessary regulations create entry barriers. and discourage. entrepreneurs from introducing beneficial products and processes 6. the practice of treating all regulated businesses. as equivalent may lead to inefficient use of regulatory agency resources, enforcement problems, and. actions inconsistent with the legislative intent of. legislation 7. alternative regulatory approaches which do not conflict with the stated objectives of applicable statutes may be available which minimize the significant economic impact of rules on small businesses. 8. the process by which Federal regulations are developed and adopted should be reformed to require agencies to solicit the ideas and comments of small businesses. to examine the impact of proposed and existing rules on such entities and to review the continued need for existing rules(31) And to ensure that the intent of Congress was clear, it stated: It is the purpose of this act to establish as a principle of regulatory issuance that agencies shall endeavor, consistent with the objectives. of applicable statutes, to fit regulatory and informational requirements to the scale of businesses. To achieve this principle, agencies are required to solicit and consider flexible regulatory proposals and to explain the rationale for their actions to assure that such proposals are given serious consideration.(32) In 1996, Congress enacted the Small Business Regulatory Enforcement Fairness Act (SBREFA)(33) which amended the RFA in several significant ways. First, it gave the courts jurisdiction to review agency compliance with the RFA, thus providing for the first time an enforcement venue to ensure agency compliance with the law. Second, it mandated that the Environmental Protection Agency (EPA) and the Occupational Safety and Health Administration (OSHA) convene Small Business Advocacy Review Panels(34) to elicit information from small entities on regulations expected to have a significant impact on them and to do so before the regulations are published for public comment. This formalized for these two agencies a process for involving small entities early in the agencies' deliberations on the small business impacts of regulations and to force consideration of equally effective alternatives. Third, SBREFA reaffirmed the authority for the Chief Counsel for Advocacy to file amicus curiae (friend of the court) briefs in appeals brought by small entities from agency final actions.(35) The Role of the Office of Advocacy Regulatory Development. When Congress created the Office of Advocacy in 1976 within the U.S. Small Business Administration, Congress mandated that the Office measure the "direct costs and other effects of government regulation on small business."(36) The RFA, enacted four years later, requires the Chief Counsel to report annually to the President and the Congress on agency compliance with the law,(37) and the SBREFA, enacted in 1996, made the Chief Counsel a statutory member of the EPA and OSHA Small Business Advocacy Review Panels.(38) Essential to these mandates are: Y research on small business trends in the economy Y independent analyses of the impact of proposed regulations on small business Y two-way communications with small business trade associations and leaders throughout the country on regulatory impacts and emerging issues Y ad hoc industry-specific roundtables to discuss small business sector concerns, and Y meaningful small business participation in the development of public policy Regulatory Issues - More Diverse and More Complex. In recent years, the economy has been extremely dynamic - constantly churning - with technology changing industry structure at an extremely rapid pace, creating new challenges for analyses of regulatory impacts on small business. Small business is a major force in the changing economic landscape, contributing major technological innovations that are spurring growth in the economy and creating most of the new jobs. As such, the continued viability of small business must be ensured. As the economy becomes more technology based, not surprisingly, regulations are dealing with more and more complex and technical societal issues on which there may be little or conflicting data. Staff Expertise. This requires more sophisticated impact analyses than before and a level of expertise in the staff that can only be developed over time or, in the alternative, by changing the professional mix of the staff at the discretion of the Chief Counsel.(39) Currently Advocacy's regulatory staff is organized around issues on which they are very well versed and on which they continue to expand their expertise. On some issues, teams have been developed to ensure continuity and back-up. (See Appendix I) Data Sources - Statistical as well as Anecdotal. If regulations are unduly burdensome, they could dampen the economic growth experienced in recent years. Therefore, regulatory impact analyses are taking on an ever more important role in public policy deliberations. Policy makers are increasingly aware that the key to rational decision making is data. To provide some of the answers as to the impact of proposed regulations on small business, the Office of Advocacy makes available its unique database - Statistics of U.S. Businesses (SUSB) - on its web site at www.sba.gov.advo/stats. Agencies can refer to this database to estimate the number of firms that could be affected by a proposed regulation. However, this data only address one part of the impact equation. To supplement it, Advocacy has issued task order contracts,(40) under which assignments are given to the contractor to estimate the compliance costs of a proposed regulation on the regulated industry, as well as to develop estimates on the amount of the problem that is solved by applying the regulation to small entities. The information provided by contractors has been extremely helpful in evaluating EPA and OSHA regulations. Information made available to these agencies early in the process has significantly influenced agency deliberations and the design of regulatory proposals. More often than not, the contractor's data has been corroborated by small entities participating in the Small Business Regulatory Review Panels. Finally, current (anecdotal) data have been compiled through discussions with small businesses, their representatives and economic experts. Advocacy has convened ad hoc industry-specific roundtable meetings and conference calls with small entities. These activities have generated additional information on small business impacts. SBREFA and Judicial Review RFA Litigation. By the end of FY 2000, SBREFA will have been in effect for a little over four years. It is clear that the 1996 amendments are having a major impact on the work of federal agencies. Much of this impact is due to the fact that small entities are increasingly seeking judicial review of agency compliance with the RFA and having some success. Several court decisions have remanded rules to agencies for failure to comply with the RFA. All of the known RFA court decisions are summarized in Appendix J. The decisions have been Shepardized and the tabulation is posted on Advocacy's web site at www.sba.gov/advo/laws/rfa_shep.pdf. Advocacy as Amicus Curiae. When the RFA was enacted, agency compliance with the law was not reviewable by the courts in regulatory appeals. Nevertheless, Congress authorized the Chief Counsel to file as amicus curiae in such appeals. In 1986, the Chief Counsel for Advocacy filed its first amicus curiae brief, but later withdrew it after it was challenged by the DOJ. The DOJ maintained that the Chief Counsel's amicus curiae authority was unconstitutional on the grounds that it would impair the ability of the Executive Branch to fulfill its constitutional functions. The Department cited Executive Order 12146, Section 1-402, which states that legal disputes between two agencies are to be resolved by the Attorney General. The then Chief Counsel argued that an executive order could not override a statute, namely the RFA, but nevertheless withdrew the brief. Then in September 1994, the current Chief Counsel decided to file as amicus curiae in a Federal Communications Commission (FCC) proceeding. The brief was prepared but the issue was resolved with the Commission before the filing deadline. During discussions with the FCC, DOJ attempted to object to the filing arguing that the Chief Counsel's authority was narrow and could not address the merits of the rule. The issue was mooted by the out-of-court resolution of the dispute. Subsequently, in 1995 when Congress was debating possible changes to the RFA (not enacted at the time), Congress addressed the Chief Counsel's amicus curiae authority as follows: The ability to appear as amicus curiae is important to the ability of the SBA Chief Counsel for Advocacy to represent the interests of small businesses in the rulemaking process. Furthermore, if this bill should become law, with its provisions to permit judicial review of agency compliance with the Regulatory Flexibility Act, the importance of the Chief Counsel's ability to file amicus briefs will be magnified.(41) The Chief Counsel had suggested that the exact scope of the authority needed clarification. When Congress enacted SBREFA in 1996, it in fact clarified the Chief Counsel's authority to authorize comments on: (1) agency compliance with the RFA; (2) the adequacy of an agency's rulemaking record with respect to small entities; and (3) the effect of a rule on small entities. Advocacy's first brief was filed in Northwest Mining Assoc. v. Babbitt.(42) The court agreed with the issues raised by Advocacy and remanded the rule to the Department of Interior for further analysis. The DOJ did not file formal objections to the filing with the court. Other Impacts of SBREFA. Agencies are watching court decisions closely and are increasingly seeking assistance from the Office of Advocacy in the earliest stages of regulatory development, presumably not just to avoid appeals, but also to avoid having Advocacy appear as amicus curiae. This is evidenced by the marked increase in requests for Advocacy's assistance prior to publication of a rule for public comment. This is a change from Advocacy's pre-SBREFA experience or experience prior to Advocacy's successful filing of its first amicus curiae brief. There is also increased willingness on the part of regulatory agencies to participate in Advocacy's ad hoc industry roundtables where discussions focus on current problems. These roundtables play an important role in opening up dialogue between small entities and government regulators. All of this indicates that a cultural change is underway in regulatory agencies. The potential for judicial review provides a significant incentive for agencies to do more in-depth small business impact analyses and to take other steps to strengthen in-house regulatory development processes. For example, the National Marine Fisheries Service (NMFS) has instituted some internal changes that could lead to improved impact analyses. Other noticeable improvements have occurred at the Health Care Financing Administration (HCFA) and at the Agricultural Marketing Service (AMS). Industries regulated by these agencies are part of the basic structure of the economy and are dominated by small entities. While regulations affecting these industries are not front-page news, regulatory impacts can often mean the difference between survival and extinction of small entities. Having said this, it is important to note, however, that this cultural change is by no means uniform within or among regulatory agencies. The largest hurdle to overcome remains agency resistance to the concept that regulatory alternatives that are less burdensome on small business may, in fact, be equally effective in achieving public policy objectives. (See supra "Barrier No. 2" p. 7.) Economic data thus become the force majeure in overcoming this resistance. Small Business Advocacy Review Panels. The value of economic data and good regulatory flexibility analyses has been demonstrated time and again in the work of the OSHA and EPA Small Business Advocacy Review Panels mandated by SBREFA. Since enactment of SBREFA, work has been completed on 24 Small Business Advocacy Review Panels - 21 EPA panels and 3 OSHA panels. (Appendix K) Approximately 300-400 small entities have been consulted on a very diverse array of rules. Independent data on the impact of regulatory proposals have played an important role in the deliberations of the panels. The additional input from small entity representatives has spotlighted real-life consequences of proposals under consideration. Regulations that have emerged from this process have been changed in response to the information provided and are, for the most part, less burdensome than the regulations originally considered. In one instance, a regulation was withdrawn entirely because the data clearly demonstrated that there was no need for national regulation, saving small business approximately $103 million annually.(43) It is important to emphasize that, although the regulations that emerge from panel deliberations are likely to be less burdensome on small entities, public policy objectives have not been compromised. The panel process has confirmed that: (1) credible economic and scientific data, as well as sound analytical methods, are crucial to rational decision-making in solving societal problems, and, (2) information provided by small businesses themselves on real-world impacts is truly invaluable in identifying equally effective regulatory alternatives. Although work on the panels has been productive, it has also been labor-intensive. We estimate that Advocacy alone has spent an average of 500-600 hours per panel - for a total of between 3500 and 4000 hours on the panels completed in FY 1999. Work on one OSHA panel completed in 1999 - given the scope of the regulation's application to almost all industries - probably consumed more than the average. Work on the seven panels completed in FY 2000 consumed 4000 hours or a little under 700 hours per panel. None of the OSHA rules reviewed by SBREFA panels have been finalized. EPA has finalized seven rules that have been the subject of SBREFA panels, and all seven contained significant modifications to mitigate burdensome small business impacts. A question emerges from this data. Why have only seven rules have been finalized out of the 24 that were the subject of SBREFA panels, particularly those reviewed in 1997 or 1998? Some agencies have attempted to argue that the 60-day panel process delays rules. This is one of the objections some agencies have raised to avoid having the panel process applied to them. But this rebuttal begs the question that the analyses required by the RFA, which is what SBREFA panels do, is what agencies should be doing and are required to do by the Administrative Procedure Act (APA). These agencies simply have not institutionalized the process. So the question remains: Does the 60-day panel process actually result in additional delay or is it more likely that the data and impact analyses generated through panel deliberations and the balance of the regulatory process force agencies to re-evaluate their proposals? If the latter, then the panel process contributes constructively to regulatory deliberations. This question ultimately may only be answered when the rules are finalized and their provisions compared with panel recommendations and data generated by the process. Regulatory Review Processes Advocacy's regulatory review processes primarily involve analysis of regulatory proposals published in the Federal Register and crafting public record communications on the impact of the proposals on small business. These public record documents also address the issue whether regulatory justifications and analyses of alternatives comply with the RFA. This review is significant and is in addition to Advocacy's work on EPA and OSHA panels. It encompasses the regulatory initiatives of approximately 18 additional regulatory agencies. The issues reviewed range from procurement to taxes to resource quotas to telecommunications to food and product safety to transportation safety to antitrust to mergers to Internet policies to securities and banking regulations, etc. The FY 1999 RFA report and the FY 2000 RFA report (currently under development) highlight some of those public record communications and illustrate the range of issues Advocacy has addressed. In selecting issues for analysis and public comment, Advocacy targets its resources to those regulations where Advocacy could reasonably be expected to make a difference or where the small business interest is significant but underrepresented in the regulatory process. To this end, Advocacy reviewed approximately 2600 proposed and final rules in the past two fiscal years and submitted approximately 160 comments for the public record.(44) Since enactment of the SBREFA judicial review amendment, Advocacy has been experiencing an increased workload involving pre-proposal consultations with regulatory agencies. These consultations and any written materials generated by this work are not a matter of public record. They are, however, as important as Advocacy's public record comments in effecting changes to regulatory proposals. In addition, Advocacy has increasingly been requested by OMB to participate in its review of regulations pursuant to OMB's responsibility under Executive Order 12866. It should be noted that Advocacy does not restrict its activities exclusively to RFA issues. It has in fact intervened in other matters where the impact on small business is significant. Reports for the last two years, although they are technically reports on compliance with the RFA, nevertheless have contained descriptions of Advocacy's activities involving two entities not subject to the APA or the RFA. These entities are the Internet Corporation of Assigned Names and Numbers (ICANN)(45) and the U.S. Postal Service.(46) Advocacy became involved with these two entities because of their market dominance and because their activities are having a major impact on small businesses. Advocacy is of the view that small business needs a spokesperson to represent them in the proceedings of all government or quasi-government bodies. Regulatory Savings(47) The impact of SBREFA goes beyond modifications just to EPA and OSHA regulatory processes. The impact is affecting the work of all regulatory agencies. As stated earlier, agencies logically wish to avoid judicial challenges to their rules and are taking greater care to comply with the RFA. Rules have been changed to minimize burdens on small entities. We estimate that changes made to rules in 1998 resulted in $3.2 billion in savings to small business as a whole.(48) (Appendix L) Changes made to rules in FY 1999 reduced the potential cost of regulations by $5.3 billion. (Table I) In FY 2000, the estimated cost savings to small business are $3.4 billion (Table II). Conclusion The RFA report for FY 2000, to be submitted by the current Chief Counsel, will be the nineteenth report since enactment of the RFA in 1980. It will mark the 20th anniversary of enactment of the RFA and it will be the fifth report since enactment of the 1996 SBREFA amendments. A cursory review of these and earlier reports will reveal different levels of compliance by regulatory agencies, even by different agencies within a department. The main improvements to be noted, however, are the changing role of data in regulatory development and the impact judicial review has had on agency compliance. Cost savings that result from modifications to regulatory proposals can now be documented using the data generated by the regulatory agencies themselves and/or by other third-party sources. These savings are the true measure of SBREFA's impact. While the savings are, on the one hand, good news, they are at the same time bad news because agencies are still not doing enough in-depth small business impact analyses before proposing regulations. For this reason, Advocacy maintains that the biggest hurdles to overcome are agency resistance to understanding the importance of small business to the economy (see supra "Barrier No. 1" p. 7), and to accepting the notion that less burdensome alternatives can be equally effective in accomplishing public policy objectives (see supra "Barrier No. 2" p. 7). These concepts need to be inculcated into regulatory agency deliberations in order for the RFA to have a meaningful impact on reducing the regulatory burden for small business. Very likely this will remain the challenge for Advocacy in the coming years. THE PUBLIC POLICY ROLE OF SMALL BUSINESS STAKEHOLDERS "Small Business Voices Rationalize Public Policy" - Anon. Introduction Small businesses in the U.S. - 24.8 million strong - are diverse, fragmented, and located in every city in the United States. Entrepreneurs are busy running their businesses with little time for monitoring or devoting time to federal or state legislative or regulatory processes, despite the impact governmental decisions could have on their livelihood. Congress recognized this dichotomy and it is one of the reasons the Office of Advocacy was created, namely, to ensure that there would be an informed small business voice participating early enough in federal deliberations that small business impacts would be adequately addressed and barriers to competition avoided. Research and statistical data are vital to sound public policy. But research data are historical. They reflect what has already occurred. While the data admittedly can provide some insights on what the economic trends are likely to be - insights that are important to public policy - they do not mirror what is happening now in the marketplace. Only small businesses can provide this information. The challenge then, is how to make small businesses visible in the process; how to establish two-way communications with them; how to maintain a network throughout the U.S. to identify emerging problems and new small business leaders; and how to create a continuum of contacts at the local level on an ongoing basis. The following describes techniques that have had demonstrable success in accomplishing these objectives. White House Conference on Small Business Congress enacted a law establishing a Commission, with funding, to organize a White House Conference on Small Business (WHCSB) to be held in 1995. The Process. Beginning in 1994, conferences were held in each state of the union (two in the larger states) attended by qualified small business owners who wished to attend. The attendees were provided an Issues Handbook prepared by the Office of Advocacy that was intended to help the delegates identify issues they wanted included on the agenda of the national conference. Advocacy's regional staff played a pivotal role in coordinating these 50-plus state meetings, promoting attendance, discussing issues with potential attendees and ensuring that a full range of small businesses was represented. Attendees at the state conferences elected delegates to six regional conferences who would in turn be delegates to the national conference. The White House, each Member of Congress and Governors also nominated an additional number of delegates. In June 1995, over 2000 small business people convened in Washington, D.C. They heard presentations by the President, the Vice President, Congressional leaders and Cabinet officials. The delegates debated issues in 10 broad topic categories, eventually consolidating their deliberations into 60 recommendations. Before the national conference, the Office of Advocacy held a series of 15 focus groups to tap the insights, experiences and perspectives of a diverse group of experts who were knowledgeable about small business issues. The discussions were summarized in a publication, The Third Millennium, distributed at the conference to all the delegates.(49) Implementation. The Office of Advocacy had the responsibility for monitoring implementation of the recommendations - whether the recommendations required legislative or administrative action. The active support of the Executive Branch and the Congress was essential to the successful implementation of the recommendations. Advocacy created a network of Regional Implementation Chairs, elected by the WHCSB delegates; a committee of State Chairs; and ten committees of Issue Chairs, each focussing on one of the 10 broad topics debated by the WHCSB delegates. This network worked closely with the Office of Advocacy over a period of three years on implementation efforts. During this time, cabinet sponsored meetings were held with agencies to discuss the recommendations and how to address them, distinguishing those that could be implemented administratively from those that required congressional action. Periodic reports were made to the President at his request on the progress being made. A directory was compiled by Advocacy and distributed to Congress of "issue" experts (WHCSB delegates) who expressed an interest in working with the Congress on small business issues. The directory was designed to help Congress identify potential witnesses expert on small business issues for upcoming hearings. The Office of Advocacy also had the responsibility for filing annual reports to the President and the Congress on the status of the recommendations. The final report was submitted in July 2000(50) in which the Office was able to report an unprecedented record of policy actions, surpassing that of both the 1986 and 1980 Conferences. A list of legislative actions taken to implement some of the recommendations is included in Appendix M. Outgrowth. Two committees of Issue Chairs have remained active to this date: Tax Chairs and Technology Chairs. Their dedication is further evidence of how effective small entities can be in influencing public policy when a working partnership is established between them and government officials. (1) Tax Chairs. This group of Issue Chairs has remained extremely active, in part because of tax legislation introduced by Congress to implement recommendations of the WHCSB. The Chairs have also been very active keeping members of Congress informed on small business tax concerns and have played a major role in the adoption of administrative initiatives by the IRS. Their expertise has been invaluable in several meetings with senior policymakers at the Treasury Department convened to discuss major tax issues, meetings in which the Tax Chairs have been extremely persuasive in arguing the small business agenda. Issues discussed included independent contractor definitions and pending legislation, IRS reform, cash versus accrual accounting; electronic tax reporting and paying; pension plan expansion. Treasury officials have been very responsive and receptive to problems identified by the Tax Chairs. The IRS has also appointed 4 different Tax Issue Chairs to several advisory councils including the Internal Revenue Service Advisory Council; the Electronic Tax Administration Advisory Council and the Commission on Restructuring. Most recently, the Employee Benefits Division of the U.S. Department of the Treasury sought Advocacy's opinion on regulatory proposals related to "new comparability cross testing."(51) By consulting with Advocacy first and then with others recommended by Advocacy, Treasury was able to produce a stronger, more defensible proposal that protected small businesses while protecting pension participants and taxpayers. (2) Technology Chairs. Reflecting the growing importance of the technology sector in the U.S. economy, technology based small businesses were represented at the 1995 WHCSB in greater numbers than in earlier conferences. In addition to remaining involved with technology issues, such as R&D tax credits, universal access to the Internet, the Small Business Innovation Research Program, patent and intellectual property reform, etc., these chairs organized the Small Business Technology Coalition. The Coalition has as its mission ensuring the evolution of sound public policy to promote technology and is the first such organization dedicated to monitoring and participating in governmental deliberations on the role of technology in the economy. Coalition members have testified before Congress on a wide variety of technology issues. Industry Roundtables As noted earlier in this document, information on current trends and regulatory impacts can be most effective when it comes from small businesses themselves. Historical data on specific industries does not always exist from which inferences can be taken as to the impact of specific regulations. In order to develop some knowledge about current industry structure, etc., ad hoc industry-specific roundtable meetings have been convened by Advocacy to discuss pending issues informally with small business representatives. Representatives from relevant regulatory agencies and congressional committee staff have also been invited to participate. The meetings have uniformly been viewed as helpful in identifying and raising awareness of small business issues. Industry-specific roundtables have been convened on: Y environmental issues (sulfur emissions, toxic release inventories, etc.) Y fisheries (quotas, Fishery Council decisions, etc.) Y transportation (hours of work, accommodations for the disabled under the Americans with Disabilities Act, etc.) Y telecommunications (universal service, ICANN, etc.) Y worker safety (health and safety programs and ergonomics) Y mineral resource allocation and land management (site reclamation, mill site descriptions, bonding ) Y tax (pensions, independent contractor, employee benefits, etc.), and Y procurement (procurement reforms, small business' experiences with contract bundling, etc.) Participation by entities outside the Washington, D.C. area has been actively encouraged through the simultaneous use of conference calls. Finally, a roundtable of legal practitioners who represent small businesses has been convened on a number of occasions to discuss and share information on pending litigation in which they are personally involved. New precedents (court decisions) under the RFA have been discussed. The stated purpose of this group is to understand the issues being raised by litigants before the courts and the patterns that may be emerging in the legal precedents - both good and bad. Small Entities and SBREFA Panels(52) Both EPA and OSHA must convene Small Business Advocacy Review Panels whenever these agencies are considering a regulation that is likely to have a significant impact on a substantial number of small entities. The review panel must consult with small entities that could be affected by the rule and submit a report to the head of the agency within 60 days summarizing the input from the small entities. In nearly every instance to date, information provided by small entities, in combination with other data, has proved invaluable in establishing a reality check for these regulatory agencies, namely, what the real impact of the regulation is likely to be and the actual compliance costs small entities will have to bear. Technology is making it easier for small entities to participate in the panels. Conference calls, e-mails and faxes - all facilitate information sharing and fast communications. Small entities do not have to come to Washington to be effective participants in panel deliberations. They can influence public policy working out of their own offices or production facilities, wherever they are situated in the United States. What this means is that policy makers can reach out to a more diverse and more geographically dispersed group of small entities. Agencies are no longer limited to having discussions only with Washington-based small business representatives. They can have round robin conference call discussions with small refiners in Oklahoma on sulfur emission standards, or animal feed operators in Missouri or Kansas or Iowa on water polluting run-offs, or home health care providers in Ohio on limiting employee exposure to tuberculosis. Technology is making it easier to reach more small entities if they can be identified. That is the challenge. State Conferences Delegates to the 1995 White House Conference on Small Business voiced strong concern about the impact of state regulations and policies, which, they argued, could be equally as onerous as federal regulations. The statutory mandate of the Office of Advocacy, however, extends only to federal policies, legislation and regulation. Nevertheless, to draw attention to the impact of state actions on small business and the role state and local policymakers play, the Office of Advocacy has sponsored three conferences within the past seven years (a total of 15 such conferences since establishment of the Office). At these conferences innovative and successful local small business initiatives have been showcased in the expectation that unique initiatives might be replicated elsewhere. Through presentations and workshops, state and local issues have been discussed and awards made to truly innovative programs that help small business. Descriptions of the award-winning initiatives have been published by Advocacy in a booklet that characterizes the programs as Models of Excellence. The most recent publication is available on Advocacy's Internet web site at www.sba.gov/advo/vision.html. One of the important messages of these conferences is that creative solutions to small business problems are not always crafted in Washington. Information gleaned from these conferences about state and local initiatives confirms the adage that the states are often major incubators, not only for identifying societal problems, but for solving them as well. A significant by-product of these conferences is the expansion of Advocacy's outreach to an ever-increasing number of small entities and emerging local leaders in both the public and private sectors, who can in turn be effective spokespersons in public policy deliberations at the national level. Small businesses, wherever situated in the U.S., can be effective partners in the deliberations of their government. All it takes is a commitment to reach out to them. Small Business Week The question - Are small firms important - is answered to a large extent by research. Even more impressive than numbers on a chart are real life examples of successful start-up businesses or innovative small businesses. Each year, during Small Business Week, Advocacy honors the: Y Accountant Advocate of the Year Y Entrepreneurial Success of the Year Y Financial Services Advocate of the Year Y Home-Based Business of the Year Y Minority Small Business Advocate of the Year Y Small Business Exporter of the Year Y Small Business Journalist of the Year Y Women in Business Advocate of the Year; Y Veteran Small Business Advocate of the Year, and Y SBA Young Entrepreneur of the Year Regional publicity solicits nominations from every state in the union for these awards. Applications are culled and recommendations developed by a local network of small business leaders convened for this purpose in each of the 10 federal regions. Each year these awards spotlight the work of innovative companies and small business leaders who would otherwise be largely invisible to the press, to policy makers and even to members of their own business communities. Small Business Week provides a platform and a showcase for all to see the role small business plays in the economy and how small business continues to stimulate competition. Communications Services The Small Business Advocate. This is a monthly publication distributed to a mailing list of approximately 10,000 individuals and businesses. It is designed to provide highlights of pending small business issues, specific updates on pending regulations, data on new research and a list of upcoming events of interest to small business. OpEd Page Articles. This past year, Advocacy's regional staff drafted several articles to appear in weekly newspapers, often the most read periodicals in the country. The OpEd pieces addressed small business' role in the economy and were independently edited to enhance their appeal to regional readership. Web Site (www.sba.gov/advo). Within the past year, Advocacy has remodeled its web site so that it can be used by anyone seeking information on Advocacy's research and economic reports, small business statistics, public record comments filed by Advocacy on regulations, testimony of the Chief Counsel, SBREFA panel reports, press releases and Advocacy's newsletter, The Small Business Advocate. Information provided by SBA's Office of the Chief Information Officer indicates that Advocacy's web site receives a significant number of hits, ranking in the top ten on SBA's web site. Most recently, a Shepardized compilation of RFA court decisions has been posted for use by lawyers representing small entities. This information should help reduce the time they would otherwise have to spend researching current legal precedents. Finally, a new E-Commerce Regulations and Policy web page was developed to provide small businesses with up-to-date information on Internet policies, conferences, etc. On July 12, 2000, Advocacy's small business state profiles page received a Links2Go "Key Resource" award. This award is based on an analysis of millions of web pages to determine which pages are most heavily used. Conclusion There are approximately 600,000 employer and thousands more non-employer small business start-ups in the United States each year. There is no centralized directory of these firms. These firms are known, however, to local Chambers of Commerce, to state and local economic development offices, to local bank officials, and to venture capitalists, among others. Identifying and making contact with these firms cannot be done effectively or efficiently from Washington, D.C. - at least that has been the experience of the Office of Advocacy to date. To illustrate, one of the major objectives of the WHCSB was ensuring that the delegates truly represented a cross- section of small businesses. This meant generating sufficient publicity to all industries and all groups of entrepreneurs, including women and minorities, to guarantee representative attendance at the conferences. Advocacy's regional staff worked with local leaders and organizations that had networks through which small businesses could be encouraged to participate. Regional staff also worked with local media to garner stories about the state and national conferences and the importance of the deliberations to take place. In addition, increased credibility can be established for Small Business Advocacy Review Panels when there is a diverse geographic representation of an industry participating in the discussion. These entities can only be readily identified by regional staff working closely with Advocacy's headquarters staff working on regulations on which small entity input is needed. This was Advocacy's experience when it needed to identify small petroleum refiners which could discuss sulfur content limitations in gasoline and to find articulate feedlot operators to work on anti-water polluting runoff standards (both EPA regulations) or to find home health care providers or homeless shelter managers to discuss the impact of OSHA's tuberculosis rule to limit employee exposure to the disease. There have also been occasions when Advocacy's regional staff received data from their contacts that was pertinent to national deliberations. For instance, regional staff drew Advocacy's attention to the U.S. Postal Service's proposal on commercial mail receiving agencies well in advance of national trade organizations hearing about the issue from members. In another instance, information obtained through Advocacy's regional staff provided data showing that the number of injuries and illnesses among workers had not decreased as the result of instituting health and safety programs, contradicting an important OSHA assertion. Opportunities have also developed at the local level where someone on site and in tune with the local economy could be helpful to small businesses. For example, an Air Force General was persuaded by Advocacy's regional staff to work with the small business community to find new business opportunities to offset potential losses from the phased-in closure of an Air Force base. Regional staff has also been working with universities to establish small business entrepreneurship programs as part of the college curriculum. Having the capability to expand the involvement of small businesses in national policy deliberations has leveraged the work of the Office of Advocacy. Technology is making involvement in national policy deliberations a low- cost activity for small business and public policy has been the direct beneficiary. The capacity to expand the involvement of geographically dispersed small entities can only be developed over time by maintaining day-to-day and one-on-one contacts with local leaders and with the ever- changing landscape of state and local officials. It has always been and will continue to be a work in process and clearly not a task that can be performed effectively or efficiently out of Washington, D.C. PENDING ISSUES "Information Can Forecast the Future" - Anon. Introduction Following is a litany of issues, in no particular order of priority, on which the Chief Counsel for Advocacy may be asked to take some action some time in the future.. Research Outstanding Research Contracts. Several research contracts were awarded this year and work still remains to be completed by contractors on others. A complete list of contracts with work outstanding may be found in Appendix N. Data Tabulations at Census. Near the end of each fiscal year an Interagency Agreement is signed with the U.S. Census Bureau to do new small business tabulations in the coming year. The work is paid for in advance with contract funds being transferred by SBA's finance office to Census. The data are received over a period of time beginning in the middle of the fiscal year. IRS Tabulations. A small contract is issued each year to IRS for tables on female and male operated sole proprietorships, by size, profitability, industry, state and filing status.. These tabulations are received close to the end of the fiscal year under an interagency agreement, at which time IRS presents the bill for work performed. BITS File. Several contracts have been issued to independent researchers that are based on the contractors having access to BITS data. The data in this file is information on particular firms, allowing their growth and employment patterns to be tracked over time. (See supra p. 14 for discussion of the significance of this file) The Center for Economic Studies (CES) at Census has to approve research proposals and also has to review the research results to ensure that the data is sufficiently camouflaged as not to reveal the identity of any particular firm. The IRS recently became concerned about procedures to protect the privacy of the data, as required by law, and is now also reviewing research proposals. Work on these contracts was delayed until IRS was satisfied that procedures were secure enough to guarantee privacy for the firms in the data file. This issue is likely to remain thorny and procedures to limit access may surface as more researchers become familiar with the value of the BITS file and submit research proposals conditioned on access to the file. GAO Studies. Two GAO studies may raise issues for Advocacy. One study looks at the availability of equity capital for small business. Advocacy and SBA's Investment Division worked closely with GAO in identifying sources - limited as they are - for equity investments in small business. GAO's mandate was merely to report on what is happening in equity markets and not to develop any specific suggestions for congressional or agency action. The draft report, reviewed by Advocacy and SBA staff, is comprehensive and does a reasonably good job in identifying data gaps. It does, however, implicitly point to future research that might be undertaken. A second study attempts to document the impact of recent procurement reforms on small business. This study needs to be reviewed very carefully when it is finalized to see if any of the data it provides could mislead policy makers. A lot of variables, not just procurement reforms, are having an effect on federal procurement (e.g., a reduction in the number of contracting officers), making it difficult to see exactly where corrective actions may be needed to ensure small business access to federal procurement, as well as ensure the government's access to truly competitive vendor products and services. To the extent that GAO's report may show that small business' share of federal procurement is remaining constant, despite credible complaints from small businesses about their inability to get contracts, achieving increased reliance on PRO-Net by both vendors and contracting officers takes on renewed importance. Rural Issues. During the past year, Advocacy and SBA have co-sponsored rural roundtables in several states to determine if small entities, including small farms, were having difficulty obtaining loans. Advocacy also published a report on bank lending in rural areas.(53) SBA's New Markets Initiative proposal, which has the support of the Administration, includes assistance for rural areas. More discrete research will likely be called for in the coming years on rural issues. Regulatory Development Pending Regulations. Appendix O contains a list of regulations on which Advocacy submitted comments for the record but which have not yet been finalized as of November 1, 2000. These regulations need to be monitored since, once they are finalized, small entities can file appeals. The issue will then arise as to how Advocacy's comments are used by appellants, whether Advocacy can resolve any remaining disputes with regulatory agencies outside the appeal, and, finally, whether Advocacy should file as amicus curiae. FY 2000 Report on Agency Compliance with the RFA. This report will be finalized and distributed in December 2000. It will provide information on which agencies are substantially complying with the law and those that are not. Certification The RFA allows agency agencies to certify that a regulation will not have a significant impact on a substantial number of small entities. However, the law also requires the agencies to provide a factual basis for the certification. The intent of this provision is to provide the public with enough information to rebut the certification, if appropriate. Implicit in satisfying the requirement for a "factual basis" is that agencies must do some analysis of small business impacts, something less than a full blown regulatory flexibility, but certainly something more than just an opinion, albeit informed. Some agencies are not taking this provision of the law seriously and provide "boiler plate" certification statements. This issue may require some modification to the RFA. Direct vs. Indirect Costs (Regulatory Flexibility Analyses) Mid-Tex Decision on Indirect Costs. In Mid-Tex Electric Co-op Inc. v. F.E.R.C.,(54) the court held that agencies doing regulatory flexibility analyses are in compliance with RFA if they only estimate the costs to be incurred by those entities that will be directly subject to a regulation. Agencies do not have to take into account indirect costs that occur as the result of, but which are not mandated by, a regulation. This decision is causing concern in those instances where indirect costs are foreseeable and measurable, as opposed to those that are not. Advocacy has argued that all foreseeable and measurable costs, direct and indirect, should be taken into account by a regulatory agency in order to evaluate the full impact of a regulation on small business. The National Federation of Independent Business has issued a contract for the development of a cost-benefit model that will also attempt to construct a formula for estimating indirect costs. Legislative Issues Extending the SBREFA Panel Process to Other Agencies. Two proposals were pending this past year, on which no final action was taken, to mandate Small Business Advocacy Review Panels for regulations proposed by the Department of Labor's Mine Safety and Health Administration and for all IRS interpretive rules. Advocacy testified on the Mine Safety proposal, describing Advocacy's favorable experience to date with EPA and OSHA panels. (See Appendix E) Advocacy did not testify on the IRS proposal but has stated publicly that IRS needs to do more analyses of the small business impacts of its regulatory proposals. Advocacy has also taken the position that agencies could convene SBREFA-like panels on their own initiative since they are obligated under the RFA to reach out to small businesses in the development of regulations. Agencies have been reminded that their outreach activities are now reviewable under RFA and that SBREFA-like panels would be one way to satisfy their obligations under the law. Independent Advocacy Proposals. Two proposals were introduced in the last congressional session (on which no final action was taken) that were designed to increase Advocacy's independence. One proposal would have (1) established a separate budget line item in SBA's budget for the Office of Advocacy, and (2) defined conditions under which the Chief Counsel could be removed. At the request of the Chair of the Senate Small Business Committee, Advocacy developed a budget for consideration as a line item in SBA's budget. (Appendix P) The second proposal would have (1) created a 3-member independent Commission; (2) given it power to intervene in adjudicative proceedings; (3) given it rulemaking authority over compliance with the RFA; and (4) mandated a majority vote for all official Commission actions, including comments submitted for the public record on regulatory proposals. The Chief Counsel testified on the Independent Commission bill. (See June 21, 2000 Testimony of the Chief Counsel in Appendix E.) Amicus Curiae Authority. Whenever a dispute arose in the past several years in which Advocacy considered filing as amicus curiae, the Chief Counsel first contacted the regulatory agency and the DOJ to see if Advocacy's concerns could be resolved. In most instances resolution was achieved, except in the Northwest Mining Assoc. v. Babbitt(55) case in which the Office of Advocacy filed its first amicus curiae brief. Prior to this filing, meetings had been convened by the Office of Information and Regulatory Affairs (OIRA) of the Office of Management and Budget (OMB) with regulatory agency representatives to discuss compliance with the RFA in general terms. At one of these meetings, the DOJ raised questions about the Chief Counsel's amicus curiae authority, which it alleges raises constitutional issues. However, DOJ raised no formal objections to Advocacy's amicus curiae filing in Northwest Mining and has worked with Advocacy in other cases to resolve issues involved in regulatory appeals. There is no way of knowing if the incoming administration at DOJ will be aggressive in objecting to the Chief Counsel's amicus curiae authority. (See Appendix Q for additional information.) Due Deference to Advocacy Interpretations of the RFA. In American Trucking Association v. EPA,(56) the U.S. Court of Appeals for the District of Columbia ruled that SBA "neither administers nor has any policy making role under the RFA; at most its role is advisory. Therefore, we do not defer to the SBA's interpretation of the RFA." This appellate court decision may not be binding on lower courts in other circuits. It could nevertheless carry some weight and also undermine Advocacy's effectiveness in promoting compliance with the RFA. Conversely, in Southern Offshore Fishing v. Daley,(57) the court quoted from Advocacy's comments that critiqued the lack of justification for Department of Commerce's certification that the reduction in the shark quota would not have a significant impact on a substantial number of small entities. The court in this case remanded the rule to the Department so that it could do a proper regulatory flexibility analysis. Quadrennial Small Business Conference. One of the recommendations of the 1995 White House Conference on Small Business urged that a conference on small business be held every four years. The White House indicated support for such a proposal. However, no action has been taken by Congress to implement the recommendation. Nor was any action taken by Congress on a recent proposal calling for a "Quadrennial Small Business Conference" to be organized by a commission. One issue to be considered is whether or not a conference organized by a commission would have the same impact as a "White House Conference on Small Business." Another issue is the scope of Advocacy's involvement with such a conference, if one is mandated by Congress. If the process replicates that of the 1995 Conference, then Advocacy's role could involve a significant commitment of resources - the time of headquarters and regional staff and expenses, principally travel. Y For the 1995 conference, Advocacy's headquarters staff prepared two issue handbooks(58) - one for the state conferences and another for the national conference that included changes to reflect what had transpired at the state conferences. Y Advocacy's regional staff were heavily involved in conference preparations over a period of 18-24 months, beginning with the first state conference through 50+ state conferences, 6 regional conferences and the national conference. Managing the logistics for these conferences in each of the 50 states was very time consuming and included arranging for conference sites, promoting attendance, working with Governors' offices and small business trade associations to elicit their involvement, answering attendee questions about issues and procedures, etc. Y Advocacy's reporting responsibilities included preparation and publication of the Conference's final report and 3 annual reports on implementation of the conference's recommendations. These reports were mailed to all 2000 WHCSB delegates. Taxes. As this paper is being drafted, Congress is considering a bill that includes small business tax incentives. The President has threatened to veto the bill unless certain Medicare and pension charges are made. The bill also includes an increase in the federal minimum wage. The small business issues in the bill include the following (and may re-surface in the next session of Congress if not enacted now): Y an increase in section 179 expensing to $35,000 Y 100% deduction for the cost of medical insurance for the self-employed Y some permissible installment income calculations for accrual basis taxpayers Y clarified cash accounting rules for small business to permit cash accounting without limitation Y extension of the Work Opportunity Tax Credit through June 30, 2004 Y increase in the business meals deduction to 70% in 2001, and Y increases in contributions to 401K and simplified pension plans Small Business Innovation Research Program.(59) This program, which had its genesis at the National Science Foundation (NSF) and was subsequently established as a national program by an act of Congress, was strongly supported by the first Chief Counsel of the Office of Advocacy. The program represents a $1 billion annual investment by major federal agencies such as the Department of Defense and the National Aeronautics and Space Administration, in small business high-tech innovative research and development that benefits the work of federal agencies. It is now a program overseen by SBA, but Advocacy has remained involved from the very beginning because of the program's importance to small high-tech companies. However, despite the program's major successes and despite several GAO reports confirming its benefits to the government, the program inexplicably repeatedly comes under attack. SBA and Advocacy have been vigilant in identifying flaws in arguments posed by the program's opponents. With the changeover in administrations and the possible loss of institutional knowledge, the program is likely to come under attack again. Any weakening or the demise of the program would be a significant loss to small business and to the Government, which is the direct beneficiary of the R&D performed for it by these high-tech SBIR award winners. Re-authorization of the program is currently pending in Congress. Bankruptcy Reform. Reform legislation that was pending failed to pass this Congress. It will likely return in the next session. (See supra p. 23 for discussion of this issue.) The issue will then be whether the protections for small business worked out in this congressional session will survive in the next session of the Congress. Administrative Issues ACE-Net. As explained earlier, ACE-Net was never intended to be a permanent federal program. An independent non-profit ACE-Net, Inc., has been formed and is in the process of receiving funding from organizations and foundations supporting small business and entrepreneurship. Over 97 percent of the operating cost of ACE-Net is currently being borne by the local Network Operators and they have voting control of the management of the system. The only federal funding for ACE-Net is in support of the Internet site management at the University of New Hampshire, Whittemore School of Business and Economics, which will end on November 30, 2001. At that time, the program will be entirely independent of the federal government. State Conference. Three state conferences have been convened by the Office of Advocacy under the current Chief Counsel in December of 1995, 1998, and 1999. In addition there was a reunion in 1996 of the delegates to the WHCSB to review the status of implementing the conference's 60 recommendations. No conferences were planned for 1996 or 2000 (election years) to avoid any appearance of partisanship. In all, 15 such conferences have been held since establishment of the Office of Advocacy. These conferences have been an effective vehicle for showcasing innovations at the state and local level that help small business. The issue is whether to have a conference in 2001, or, more realistically, in 2002 or 2003. Organizing such a conference involves a significant amount of advance work by Advocacy's regional staff to identify new state and local small business innovations that would be the focus of the conference and around which the conference would be organized. Ombudsman. When SBREFA established the Ombudsman position, the question was raised as to who should be the Ombudsman. The question could re-surface in the future. A memorandum outlining the pros and cons on who should serve as Ombudsman is contained in Appendix R. Advocacy's Current Budget. Advocacy does not have a line item in SBA's budget for its entire budget that includes salaries and expenses. Therefore, its budget and staffing are driven by SBA's support and budget constraints. Advocacy, therefore, can only do as much or as little as the budget allows. In brief, Advocacy has three major budgetary issues. They are: (1) the number of staff Advocacy can have on board (currently 49,(60) including any personnel detailed to Advocacy from other agencies or under the Intergovernmental Personnel Act (IPAs)); (2) travel funds; and (3) the amount of money available for research. Over the years, Advocacy's personnel ceiling has declined dramatically (see Appendix S), despite increases in the Office's statutory responsibilities. By the same token, staff productivity has increased dramatically because staff has increased its expertise in their issue areas. However, there is lingering concern that major issues may be going un- addressed. Thus far, staff has been able to avoid any major omissions in its regulatory review. Travel remains an issue in order to have adequate funds to allow Advocacy's regional staff to develop, nurture and maintain small business contacts in all 50 states. As for economic research, there was a period of time when there was no separate line item for Advocacy research in the SBA budget. In both FY 97 and 98, the SBA Administrator re-programmed $700,000 to Advocacy from discretionary funds. A line item for research in the amount of $800,000 was re-established by Congress in the FY 1999 SBA budget. In FY 2000, the research line item was $1,091,000. The Conference Report on SBA's FY 2002 budget recommends $1,100,000 for Advocacy research. As this document is being written, SBA is developing its FY 2002 budget request for submission to OMB. Advocacy is requesting $2.5 million for economic research. RFP Process. Advocacy's efforts to award research contracts have been somewhat thwarted by inefficiencies in the RFP process. For example, SBA continues to require paper (hard copy) communications throughout the process. It does not allow for Internet or e-mail correspondence. This has resulted in delays, despite efforts by Advocacy to get the RFPs out in a timely fashion. Work on Advocacy's outside research, therefore, should begin as soon as budget approval is received to avoid unnecessary delays. More important, distribution of RFP information should coincide with the academic calendar so that qualified professors and graduate students could bid as independent researchers and complete contract work during the summer months. THE NEW ECONOMY "Information is Power" - Anon. Introduction Seven years ago, when the current Chief Counsel took office, it was clear that major changes were underway in the economy that could alter its very structure - changes as significant as those wrought by the Industrial Revolution. Computers were becoming omnipresent, space technology was generating commercially viable products, communications technology was innovating faster than the market could arguably handle, and information-based services were multiplying and demand for them increasing. While it was not clear exactly how these forces would alter the economic landscape, it was clear that the phenomena warranted attention. This was necessary to ensure, not only that small business would benefit from the new technology, but that small business' role in the development of what is being called "The New Economy" would be protected to maintain U. S. leadership in this important sector. Advocacy Initiatives 1995 White House Conference on Small Business. The WHCSB provided a major opportunity to address technology issues. Significant efforts were made to ensure participation in the conference by high tech firms and these efforts were successful. Two important technology recommendations were supported by all the delegates and were included in the conference's 60 recommendations. Almost all of the issues contained in the recommendations have been addressed by policymakers. U.S. Business Advisor. Very early, Advocacy decided to work on an initiative with SBA officials and others involved with the National Performance Review program (NPR), to develop the U.S. Business Advisor. This is an Internet- based user-friendly program designed to answer questions business might ask about government programs, regulations and services. The program provides information about regulations with which businesses must comply and how to contact regulatory agencies. It is a one-stop regulatory information service. The program and all of its participants received a "Hammer Award" from NPR. It can be viewed on the Internet at www.business.gov. ACE-Net and PRO-Net. Earlier in this paper these Internet-based programs were discussed in the context of public policy. Here they are being cited for their utilization of technology, which involves a combination of custom-designed interfaces and standard "off-the-shelf" software databases and Internet tools to create new small business services. They expand and facilitate the exchange of information on two important issues - equity investment needs and procurement opportunities. They are typical of how government can use computer technology to improve the flow of information, thereby making markets more efficient. More information on these services is available on the Internet at www.ace-net.org and www.pro-net.sba.gov. North American Industry Classification System (NAICS). The Office of Advocacy worked closely with the U.S. Economic Classification Policy Committee and the Bureau of Economic Analysis to ensure that the new classification system (to replace the SICs) was structured so that data on emerging technology industries could be collected - data that would be essential to sound public policy decisions by Congress and the Executive Branch. Small Business Innovation Research (SBIR) and Small Business Technology Transfer Research (STTR) Programs. The Office of Advocacy has supported the SBIR program since it was signed into law in 1983. Congress mandated that agencies, with extramural R&D budgets in excess of $100 million, such as the Department of Defense (DOD) and the National Aeronautics and Space Administration (NASA), set aside 2.5% of these budgets for awards to small high technology firms. The total federal investment amounts to $1 billion per year to stimulate research by small firms. The SBIR is not a give-way program; it is not a "special treatment" program for small business. Proposals are subject to peer review and the projects funded must advance and enrich the R&D research mandates of the specific agencies making the awards. Congress correctly recognized that small businesses are major product innovators and that the government should take advantage of their creativity. Congress' objective for these programs has been validated by the success of the SBIR and STTR programs and the research performed by the 50,000 companies that have received awards or contracts during the programs' five year existence. To increase the visibility of the program and to promote networking among SBIR award winners, an award program was established by the Office of Advocacy in the name of the individual who was responsible for initiating the program at the NSF, before the SBIR program was institutionalized by act of Congress - Roland Tibbetts. Senior members of the Administration have hosted Tibbetts award winners at events at the White House, and senior Senators and Representatives have hosted receptions and meeting at the Capitol. The award program itself has now become institutionalized within SBA on an annual basis. Patent and Intellectual Property Reform. The American Investors Protection Act of 1999 was enacted November 29, 1999, and includes a number of provisions specifically developed by the Office of Advocacy in cooperation with small business high tech trade associations and inventor's groups. Provisions include, among others: (1) certainty of patent term; (2) limitations on pre-publication of applications before grant of patent; (3) limitations on patent re-examinations; and (4) improved definitions on "prior use" rights. Food and Drug Administration (FDA) Product Approvals. Studies conducted at the University of California San Diego (UCSD) indicated that delays in product approvals after completion of clinical trials did not result from lack of scientific data, but from internal management processes. Through the intervention of the Chief Counsel, the UCSD researchers presented their findings to the FDA Commissioner in the summer of 2000. It is not yet clear what corrective actions will be taken by FDA. Internet Domain Names. ICANN is the private non-profit Internet Corporation for Assigned Names and Numbers, which has been charged by the Department of Commerce to administer the technical management of the Internet on a worldwide basis. Its task is monumental, particularly given the speed of technological development and use of the Internet by millions of businesses on a global scale. Advocacy has become concerned that small business issues are not being addressed adequately; that procedures of ICANN might inhibit small business participation in the corporation's policy deliberations; and, in some instances, the corporation is not taking enough time to consider the ramifications of its decisions on small firms. In defense of ICANN, fast action is needed on technical policies, and ICANN's budget is very small given the responsibilities assigned to it. Therefore, in addition to commenting on ICANN proposals, Advocacy has initiated efforts to inform the small business community, dependent on or developing products/services for the Internet, about the importance of their involvement. A new web site has been developed on Advocacy's home page to keep small businesses informed of the actions of ICANN and other Federal agencies that affect e-commerce. Finally, Advocacy has been developing information on small business' role in the New Economy. (See Appendix G for related research.) It seems clear, just from media accounts alone, that small businesses have been driving much of the technological development of the Internet and related telecommunications products and services, some firms even becoming large businesses in the process, e.g., Qualcomm. As for users of the Internet, Advocacy's research(61) estimates that 85% of small firms will be conducting business over the Internet by the year 2002. Business-to- business e-commerce, while still a small aspect of this new economy, is growing rapidly; some project a compound annual growth rate of 41 percent over the next five years. It is unclear which small business sectors will benefit most from these trends - and which will face new barriers to competition. As high-tech innovators, it is estimated that in 1997 there were 231,000 establishments in computer programming, data processing and other computer-related service industries. This is more than three times greater than the Census Bureau's reported number of these establishments in 1994. They contributed $134 billion to the GDP and small firms dominated the industry. (See Appendix T for additional data.) Related to this growth is the large number of scientists and engineers employed by small firms which has grown steadily as large businesses downsized and reduced their investments in corporate research laboratories. The most recent data from NSF shows that small businesses now employ more degreed scientists and engineers than large businesses, and more than the universities and federal labs combined.(62) Conclusion The only certainty about the New Economy is that it will bring change. And that change will involve new and unforeseen regulatory issues in a variety of federal agencies. Efforts need to continue to forecast the future of small business as was done for the 1995 WHCSB with publication of the Third Millennium, updated in 1999. New predictions need to be developed in the context of the New Economy. This will be one way to provide a voice in Washington for the high tech industry, which thus far has largely been the role played by the Office of Advocacy, providing the industry early warning signals about initiatives affecting them. Clearly, small business has a major stake in the New Economy. The public policy issues are numerous and thorny. Significant debate has already started on some of them: Y Taxation of goods and services sold over the Internet Y Privacy Y Fraud and identity theft Y Patent reform Y Copyright and trademark protection Y New top level domain name development Y Abusive domain name registration Y Encryption controls Y Exportation of e-commerce goods Y Unsolicited e-mail Y Network integrity and security Y Uniformity of law - federal, state, and international Y The digital divide Y Privacy and insurance issues for genetic testing Y Extended patent life for medical products that involve long clinical trials Even the most expert cannot predict where the New Economy will take us. The road is strewn with speed bumps, as well as opportunities for small business. It is fair to conclude that New Economy issues will preoccupy the Office of Advocacy for some time to come. CONCLUSION "Historical Information is Prologue" - Anon. Advocacy as an Independent Entity within SBA This paper would be incomplete without a discussion of the relationship between the SBA Administrator and the Chief Counsel. The relationship influences the overall effectiveness of the Office of Advocacy, largely because Advocacy's budget is part of SBA's budget. If that relationship is solid, the Administrator can reinforce Advocacy's message in cabinet meetings. Small business is then the beneficiary. SBA's Strategic Plan. Being a voice for small business is one of the goals of SBA's most recent strategic plan. Advocacy is that "voice" since its role is to be a voice for small business on the cutting edge of policy deliberations spanning the entire federal government. By contrast, the bulk of SBA's mission is to develop and implement programs that address market imperfections in financial markets. It does not have the staff or the expertise to address the wide range of policy issues that come within the purview of the Office of Advocacy. However, the two roles cross when the SBA Administrator sits in cabinet meetings discussing small business policy. Advocacy's Independence. The tension that tends to exist is created by Advocacy's stature as an independent entity within SBA. Advocacy and the SBA Administrator can be partners/advocates on small business policy issues that transcend SBA's programs until the White House formalizes a position. At that point, the Administrator must speak for the Administration while the Chief Counsel can speak independently and has done so when it served small business interests. (See Appendix D) How that tension is addressed by the SBA Administrator is key to whether or not the working relationship is productive. Also key is the respect each shows for the role of the other. But, while this unique relationship could cause some tension, Advocacy has thus far found that the tension can be managed constructively. More importantly, the tension is a small price to pay for being part of the Administration, thus ensuring that Advocacy has early access to policy makers at the highest levels within the Executive Branch. Early access provides the best opportunity for the Chief Counsel to influence policy decisions affecting small business. History is Prologue What has been reported here is what has transpired during the administration of the current Chief Counsel (1994- 2000) to track and document the contributions made by small business to the economy and to ensure that public policy does not erect barriers to competition. As long as preserving competition remains a national goal, the answer to the question "Are small firms important?" will always need to be up-dated in the context of what is currently occurring in the economy. The work and projects undertaken during the past seven years built upon the experiences of the Office's earlier activities. That earlier experience was reviewed in a special edition of the Small Business Advocate on the occasion of the Office's 20th Anniversary in 1996. That issue of the Advocate is included in Appendix U. We trust that the material contained herein has been enlightening and that it suggests ways to increase the impact of the Office of Advocacy. ENDNOTES 1. Zoltan J. Acs, Are Small Firms Important? Their Role and Impact (Kluwer Academe Publishers Group 1999). 2. Id. 3. 15 U.S.C. 631(a) (Declaration of Policy). 4. Id. 634(a) et seq. 5. Id. 6. The Regulatory Flexibility Act, Pub. L. No. 96-354, 94 Stat. 1164 (codified at 5 U.S.C. 601 et seq.), became law on September 19, 1980. 7. The Small Business Regulatory Enforcement Fairness Act of 1996, Pub. L. No. 104-121, 110 Stat. 857 (codified at 5 U.S.C. 601 et seq.), became law on March 29, 1996. 8. 15 U.S.C. 634b. 9. Id. 10. One such issue was whether courts could review agency compliance with the RFA during appeals from regulations. The issue first arose after enactment of the RFA in 1980 and was finally resolved with enactment of SBREFA in 1996 which authorized courts to review agency compliance with the RFA. 11. Having the SBA Administrator as a member of the Cabinet provides additional access to major policymakers in the Executive Branch. 12. The State of Small Business - A Report of the President is prepared annually by the Office of Advocacy. Since the report is a report of the President, it goes through complete review by Executive Branch agencies, often, however, with inordinate delays. Copies of the latest report are available in Advocacy's publication room. 13. 15 U.S.C. 634d(1). 14. Id. 634(b)-(c). 15. A complete list of economic research reports published within the past 7 years, including reports on sponsored research, can be found in Appendix G. 16. The Small Business Economic Policy Act of 1980, Pub. L. No. 96-302 (1980). 17. Advocacy's data has been published in Entrepreneur and Inc. magazines and in the New York Times, Los Angeles Times, and Dallas Morning News. 18. The Impact of Contract Bundling on Small Business, FY 1992-FY 1999 (Eagle Eye Publishers 2000). 19. Federal Procurement from Small Firms: United States Summary - National Ranking of Federal Procurement Centers on their Procurement from Small Firms in FY 1998 (Office of Advocacy 1999). 20. Alicia Robb, The Role of Race, Ethnicity, and Discrimination on Business Survival (Office of Advocacy forthcoming 2000); Brian Headd, Business Success: Factors Leading to Surviving and Closing Successfully (Office of Advocacy forthcoming 2000). 21. Mergers and Acquisitions in the United States: 1990-1994 (Office of Advocacy 1998). 22. Zoltan J. Acs, Catherine Armington, and Alicia Robb, Measures of Job Flow Dynamics in the U.S. Economy (prepared under contract with the Office of Advocacy 1999). 23. Using data from BITS, it has been estimated that 72% of new information technology jobs came from firms with fewer than 500 employees between 1992 and 1996. See Richard J. Boden, Establishment Employment: Change and Survival, 1992- 1996 (prepared under contract with the Office of Advocacy 2000). 24. ACE-Net network operators contribute in kind to the operations of the network. 25. See Appendix H for Chief Counsel's memorandum of February 20, 1998, in which PRO-Net's potential is discussed. 26. Thomas D. Hopkins, Profiles of Regulatory Costs (prepared under contract with the Office of Advocacy 1995). 27. 5 U.S.C. 609(b). 28. Henry R. Beale, Impacts of Federal Regulations, Paperwork, and Tax Requirements on Small Business (Microeconomic Applications 1998). 29. See Pending Issues section of this document for additional discussion of pending research. 30. 5 U.S.C. 601 et seq. 31. Id. (Congressional Findings and Declaration of Purpose). 32. Id. (b) 33. Pub. L. No. 104-121, 110 Stat. 857 (codified at 5 U.S.C. 601 et seq. (1996)). 34. See discussion infra p. 52. 35. The RFA, enacted in 1980, gave the Chief Counsel authority to file amicus curiae briefs. Subsequently, there was some dispute over the scope of this authority. SBREFA reaffirmed and clarified the Chief Counsel's authority. See discussion infra under section "SBREFA and Judicial Review" p. 31. 36. 15 U.S.C. 634(b)(3). 37. 5 U.S.C. 612(a). 38. Id. 609(b). 39. Under the Chief Counsel's Public Law hiring authority (15 U.S.C. 634d), staff are hired under 12 month renewable contracts. 40. Task order contracts increase Advocacy's flexibility in addressing complex issues, avoiding the need to hire staff with expertise in limited subject areas. 41. H.R. Rep. No. 49, 104th Cong., 1st Sess., pt. 1, at 4 (1995). 42. 5 F. Supp. 2d 9 (D.D.C. 1998). 43. In July 1999, EPA decided to withdraw the industrial laundries water pollution regulation. Based on the EPA's economic analysis, we estimate the savings to be $103 million annually. See press release on Advocacy's home page at www.sba.gov/advo. 44. The number of comments does not include reports of the Small Business Advocacy Review Panels or non-public communications generated by Advocacy is pre-proposal discussions with agencies, work that is significantly on the increase. 45. The Internet Corporation for Assigned Names and Numbers is a private, non-profit organization that has been tasked by the Department of Commerce with technical management of the Internet and has significant influence over how information is transmitted over the Internet. It also has authority to determine domain name categories and registration policies. 46. The U.S. Postal Service proposed a rule that would have a significant impact on commercial mail receiving agencies. The Service is not subject to the APA or the RFA. Advocacy nevertheless critiqued the proposal because of its adverse impact on small business and the lack of justification for the rule's underlying rationale. See FY 1999 RFA Report. 47. Prior to 1998, Advocacy's impact was measured by activities, such as the number of letters critiquing regulatory proposals. These activity measures were an imprecise measure of Advocacy's effectiveness. As a result, in 1998, Advocacy switched to impact measures, namely the savings achieved through changes made to regulatory proposals that reduce the cost of compliance. These impact measures will be somewhat more difficult to estimate in FY 2000 and will be even more difficult in years to come given the increase in pre-proposal work by Advocacy, work that results in changes prior to publication of rules for comment. See FY 2000 RFA report for a discussion of this issue. 48. The estimates for 1998 were developed by staff without third party verification (unlike FY 1999 and FY 2000). The estimates, in our opinion, are conservative. 49. Insights recorded in this publication have proven to be remarkably accurate. The publication was updated in 1999 after another round of focus groups. 50. Building the Foundation for a New Century: Final Report on Implementation of the Recommendations of the 1995 White House Conference on Small Business (Office of Advocacy 2000). 51. This process used to take into account age and experience of older employees when calculating fair contribution levels for pension plans. 52. SBREFA panels have been discussed elsewhere in this document. The point of discussing them here is to discuss the impact small entities, wherever located in the U.S., can and have had on public policy - how their input rationalizes public policy. 53. Small Business Lending in Rural America (Office of Advocacy 2000). 54. 773 F.2d 327 (D.C. Cir. 1985). 55. 5 F. Supp. 2d 9 (D.D.C. 1998). 56. 173 F.3d 1027 (D.C. Cir. 1999). 57. 55 F. Supp. 2d 1336 (M.D. Fla. 1999). 58. Copies of the Issues Handbook distributed at the 1995 WHCSB can be found in Advocacy's publications room. 59. See infra p. 73 for additional discussion. 60. Congress included funds in the FY 2001 Department of Agriculture budget for 2 additional positions within the Office of Advocacy. 61. Small Business Expansions in Electronic Commerce (Office of Advocacy 2000). 62. National Science Foundation, Division of Science Resources Studies, Will Small Business Become the Nation's Leading Employer of Graduates with Bachelor's Degrees in Science and Engineering?, NSF 99-322, Project Officers, John Tsapogas and Lawrence M. Rausch; Mary Collins, (Westat 1999).