The SBA's Masters of Disaster

Why has the agency been helping victims of California's wildfires? It's quite a story, one that starts way back when Harry Truman was President

By Lisa Miller

Now that Southern California wildfires have been extinguished, recovery agencies are releasing what will become a flood of aid money to help residents of devastated areas rebuild their lives. Efforts like these are largely the domain of the U.S. Federal Emergency Management Agency (FEMA), now a part of the Homeland Security Dept. But when it comes to loans for homeowners and renters who need extra cash to cover at least some of the damage that insurance won't, it's the U.S. Small Business Administration that hands out the checks -- and it doesn't matter whether or not applicants are small-business owners.


  If the agency's role strikes you as odd, you probably don't know too much about the bureaucratic ways and political wiles of official Washington.

The SBA's function as a disaster lender started in 1953, when Congress first formed the agency as part of a compromise between Congressional small-business advocates and Republicans intent on cleaning up government. Scandals during the Truman Administration had helped propel Republicans to power in the 1952 elections, handing them the White House and majorities in both houses of Congress for the first time in two decades.

The GOP figured it had a mandate to reduce government spending and tackle corruption, and the Recovery Finance Corporation (RFC) was a particularly enticing target. Critics charged that the Depression-era federal agency, which was essentially an enormous, government-run bank, had lost its focus after World War II and was bailing out businesses that should have been left to their fate. Charges that it also served as a pork barrel for President Truman's supporters sharpened the bitterness of the wrangle.


  Corrupt though it may have been, the RFC was a potential source of cash for small businesses, as was another GOP cost-cutting target, the Small Defense Plants Administration, formed during WWII to help small outfits win military contracts. Democrats feared that jettisoning both agencies would leave the nation's small businesses without any federal aid. Legislators who had long criticized the RFC for not doing enough for small biz, now started lobbying to save it.

Others suggested creating an independent small-business agency to take over the relevant RFC and SDPA functions. Bills to create such an agency were introduced, turf wars and deadlock ensued, and it took President Eisenhower's intervention to get things moving again. Finally, in July 1953, Eisenhower signed the Small Business Act, dissolving the RFC and forming the first small-business agency founded in peacetime.

"The SBA was created almost by accident…as a sop to Congressional small-business advocates," says business historian Jonathan Bean, an associate history professor at Southern Illinois University and author of Big Government and Affirmative Action: The Scandalous History of the Small Business Administration. Republicans were firmly against the whole idea, Bean explains, but finally endorsed it in order to win Democrats' agreement to liquidate the RFC.


  The SBA's next few years were as contentious as its birth. Given an initial two-year mandate, the SBA won permanent status only after a lot more "push-pull" activity in Congress, as Bean put it in his book. Ongoing support from a small but loud group of legislators helped the SBA's cause, as did Republican fears that killing the agency would confirm public suspicion that the GOP was a handmaiden of Big Business. Despite all the scrutiny and legislative wrangling, the SBA retained the disaster-loan program, even after FEMA was formed in 1979 to handle and coordinate disaster response.

Wrapping the disaster loans into the SBA created some serious problems at first. The SBA's reserves for both business and disaster loans were held in the same account. In the late '60s, Congress worried that the SBA, in its enthusiasm to help businesses, wasn't leaving enough money in the pot to deal with disasters, Bean says.

Later, when a new formula emerged for determining exactly how much money a reserve fund should hold, the SBA account was split in two so that the disaster portion could be kept separate, eliminating the perpetual tug-of-war between the SBA's main mandate of helping entrepreneurs and its additional role as disaster lender.

The agency's management and operations were also complicated by its disaster responsibilities. SBA staffers accustomed to working with bankers to secure small-business loans would have to drop what they were doing and "throw everything into the disaster," says Bernard Kulik, who directed the SBA's Office of Disaster Assistance between 1981 and 2000.


  This was a dicey shift for SBA staff, because disaster loans and business loans are "quite different," says Kulik. Meanwhile, small-business people from the rest of the country would go without SBA help for months, neglected until the victims of the fire, flood, and foul weather had been taken care of. The processing of business loans would languish, while new applications piled up unread. The situation was untenable, and Kulik decided to do something about it.

Thanks to his efforts, the disaster branch no longer drains resources from the rest of the agency. One of Kulik's innovations was creating a "reserve corps" of officials to handle disaster loans. The program also includes four regional offices, with permanent staff attached to each, increasing efficiency and coordination during disaster recovery efforts.

While crafting these changes, Kulik spoke at length with his cohorts about simply removing the disaster loan program from the agency's jurisdiction. No matter how they envisioned it, the end result was the same: It simply wasn't cost-effective to hand those loans over to FEMA, because FEMA is only structured to give out grants. For FEMA to have added loans to its offerings, it would have had to create a new accounting system and set of processes to handle these very different financial instruments -- essentially duplicating the system the SBA already had in place.


  Kulik's explanation would likely amuse historian Bean, who views government aid programs with a suspicion nurtured by years spent researching them. He points out that once a government entity has control over something, it is generally loath to give it up. Still, Kulik is adamant that cost was the central issue. And Bean is quick to credit Kulik with transforming the disaster program from one big headache, into an unexpected, but effective, department within the SBA.

Back in California, the SBA has already approved well over $6 million in home, property, and business-disaster loans, and FEMA has approved grants of close to $5 million. The Insurance Information Institute predicts that the fires will be the most costly in the state's history, with potential insured losses of over $2 billion. What that means for total SBA loans is unclear, but applications are pouring in -- and new funding needs are looming.

The California fires are already old news on the list of declared disaster areas on the FEMA Web site. They were bumped out of the top spot by President Bush's new declaration of a disaster area covering 15 counties in Washington state that were hit by floods in mid-October. For the SBA Office of Disaster Assistance, this fall is turning out to be a case of both hell and high water.

Miller covers small-business issues in New York

Edited by Roger Franklin

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