AGENCY:
Small Business Administration.
ACTION:
Interim final rule.
SUMMARY:
The Small Business Administration (SBA) is adjusting its monetary-based size standards, (e.g., receipts, net income, net worth, and assets) for the effect of inflation. This action is intended to maintain the value of size standards in inflation-adjusted terms. From 1994 to the third quarter of 2001 the general level of prices in the United States increased approximately 15.8% as measured by the chain-type price index for gross domestic product. This change will restore eligibility to firms that may have lost small business status solely due to the effect of inflation.
SBA is adding a provision in its regulations that will require, at least once every five years, an assessment of the inflationary impact on monetary-based size standards. This periodic review will generally ensure that monetary-based standards are current with inflationary factors, as appropriate, and that firms will not lose small business status due solely to the effect of inflation.
DATES:
Effective Date: This regulation becomes effective on February 22, 2002.
Applicability Dates: For the purposes of Federal procurements, this rule applies to solicitations, except for noncompetitive Section 8(a) contracts, issued on or after February 22, 2002. For the purpose of noncompetitive Section 8(a) contracting actions, the new size standards are applicable to offers of requirements that are accepted by SBA on or after February 22, 2002. For purposes of eligibility for economic injury disaster loan assistance to small business concerns located in disaster areas declared as a result of the terrorist attacks on the World Trade Center, New York, New York and the Pentagon, the applicability date is September 11, 2001.
Comment Period: Comments must be received on or before February 22, 2002. Upon request, SBA will make all public comments available to any person or entity.
ADDRESSES:
Send comments to Gary M. Jackson, Assistant Administrator for Size Standards, U.S. Small Business Administration, 409 Third St., SW., Mail Code 6530, Washington, DC 20416; or, via e-mail to SIZESTANDARDS@sba.gov.
FOR FURTHER INFORMATION CONTACT:
Diane Heal, Office of Size Standards, (202) 205-6618.
SUPPLEMENTARY INFORMATION:
Inflationary Review
SBA is adding a provision to its size standards regulations requiring that at least once every five years it will assess the impact of inflation on its monetary-based size standards. These are size standards based on receipts, net income, or other monetary measures. Although the provision does not mandate that SBA adjust size standards for inflation, it does provide assurances to the public that SBA is monitoring inflation and is making a decision whether or not to adjust size standards within a reasonable period of time since its last inflation adjustment. If SBA decides not to make an inflation adjustment after a review, it will continue to monitor inflation on an annual basis until such time an adjustment is made. Afterwards, SBA will review inflation on a periodic basis, but at least once within five years.
As described in § 121.102(a), SBA examines a number of economic characteristics in developing size standards. Inflation is one of many considerations in this process. SBA does not believe it is appropriate to automatically adjust size standards for inflation since other factors influence the setting of size standards. For example, changes in industry characteristics or in SBA's policies may render an inflation adjustment unnecessary or inappropriate. Under this provision, if a significant amount of inflation occurs in the economy within a five-year period, SBA will consider an inflation adjustment on a more frequent basis. SBA invites the public to comment on this policy and to suggest alternative procedures.
Inflationary Adjustment
SBA is adjusting the monetary-based size standards for the effect of inflation in order to restore eligibility to firms that may have lost small business status due solely to the effect of inflation. While these adjustments are not done on a fixed schedule, prior adjustments occurred in 1994 (59 FR 16513, dated April 7, 1994), 1984 (49 FR 5024, dated February 9, 1984), and 1975 (40 FR 32824, as corrected by 40 FR 36310, dated August 5, 1975). The current adjustment is being made at this time because inflation has increased by 15.8% since 1994, which is sufficient to warrant an increase, and because SBA believes that adjustments should be made more frequently than once every ten years, as was the case with the last inflationary adjustment.
Small business size standards are based on the six-digit industry codes of the North American Industry Classification System (NAICS). In addition, SBA has several programs that have their own size standards (e.g., Surety Bond Guaranteed Assistance, Sale of Government Property, etc.). The size standards that SBA is changing are those that are receipts based and those based upon other monetary measures. Employee-based, production-based, and those established by legislation are unaffected by inflation, and thus, not part of this rulemaking. Those standards that have been changed since the last inflation adjustment in 1994 will be increased accordingly. However, some receipt-based standards that were recently increased will not be adjusted as the inflation effect has already been factored into the new size standard. Full details of this adjustment are contained in the table, at the end of the preamble, which lists the affected industries according to NAICS.
How Does SBA Adjust Size Standards for Inflation?
The methodology for adjusting the size standards for inflation was as follows:
1. Selection of an appropriate inflation indicator. We used the chain-type price index for gross domestic product (GDP) as published by the U.S. Department of Commerce, Bureau of Economic Analysis (BEA), which is a broad measure of inflation for the economy as a whole, and is available on a quarterly basis. In the past, SBA used the implicit price deflator for GDP. Since that time the BEA has produced an improved price index, the chain-type price index for GDP, that more accurately reflects inflation. This type of index relies on annual price weights rather than on the fixed price weight that the implicit price deflator relied upon. For more information, see J. Steven Landefeld and Robert P. Parker's article “BEA's Chain Indexes, Time Series, and Measures of Long-Term Economic Growth” in the May 1997 issue of Survey of Current Business. This article may also be found at http://www.bea.doc.gov/bea/an/0597od/maintext.htm , or it may be obtained by calling the Government Printing Office at (202) 512-1800.
2. Selection of a base period. We selected the fourth quarter of 1993 as the base period since this was the ending period of the last inflation adjustment in 1994. The chain-type price index for GDP stood at 94.79 at that time.
3. Selection of an end period. We selected the third quarter of 2001 as the ending period for this inflation adjustment since it is the latest available quarterly data published by BEA. The chain-type price index for GDP Deflator stood at 109.8 at that time.
4. Calculation of inflation. Based on these price indices, inflation increased 15.8% between the base and ending periods [((109.8/94.79) −1.00) × 100=15.8%].
5. Application of the inflation adjustment to the monetary-based size standards. We multiplied the current size standard by 1.158 and rounded to the closest $0.5M.
6. Which size standards and size eligibility criteria are not being changed?
Certain size standards and size eligibility criteria are not being changed in this rule. SBA's reasons are set forth in the chart below.
| Industry | Reason not being changed |
|---|---|
| Agriculture, the Very Small Business Set-Aside program, and Small Business Investment Company Program's Smaller Enterprise size standard | Set by statute. |
| Travel and Real Estate Agents, Cattle Feedlots, and Architects and Engineers (A&E) with size standards of $1.0M, $1.5M, and $4.0M, respectively | A 15.8% and 2.9% (A&E) adjustment would be too small to warrant an increase. The A&E size standards were increased in June of 1999. |
| Eligibility criteria for small business receiving assistance from Small Business Investments Companies (SBIC) Program | In 1994, the average net worth and net income criteria were increased threefold. Current size standards are inclusive for purposes of the SBIC Program and no further increase is deemed necessary at this time. |
What Special Situations Exist Regarding the New Inflationary Adjustment?
The size standard for banks is expressed in terms of assets and is being set at $150 million. This adjustment represents more than a 15.8% increase. The current size standard of $100 million in assets was established in 1984 and was not adjusted in the 1994 inflation adjustment. The 1994 adjustment increased only the receipt based size standards. Monetary standards, other than receipts based, and program size standards were not adjusted at that time. This rule adjusts all monetary standards.
The Health Care Group's size standards were increased in December 2000; the Freight Forwarders size standards were increased in September 2000; and the Help Supply Services size standards were increased in July 2000. These changes, however, were not due to inflation but were based on the structure of these industries using data from 1992. Unlike other industries described in the table above, these industries were adjusted for inflation in 1994. A further increase is being adopted for inflation at this time in order to make these size standards current.
The Construction and Refuse Collection size standards were increased in June 2000 to account for inflation through the end of 1999. Since that time, an additional 4.3% inflation has occurred [the chain-type price index for GDP was 105.28 at the fourth quarter of 1999 ((109.8/105.28)−1.00) × 100=1.043, or 4.3%]. To adjust all size standards to the same common period with respect to inflation, the Construction and Refuse Collection size standards are being adjusted by 4.3%. The Dredging size standard of $17 million, however, is not being adjusted since that size standard was based on an analysis of specific industry cost data and other industry considerations.
The size standard for sales of government property, currently at $2 million, is increasing to $6.0 million. This especially large increase is being made due to an earlier oversight, in that this size standard was not raised from $2 million for inflation in 1984 or 1994. Therefore it is being increased to $6.0 million to bring it up to the present-day equivalent of $2 million and the most common size standard for the non-manufacturing industries.
What Other SBA Programs or Activities, Not Defined by the NAICS System, Will Have Their Size Standards Adjusted for Inflation?
The size standards associated with the NAICS Codes are primarily used in connection with SBA's financial assistance programs and federal procurement programs. SBA and other federal agencies oversee small business programs that are not covered by the NAICS Codes or use NAICS size standards as an alternative to the program size standard. Therefore, SBA will also make inflation adjustments to those programs that have any monetary-based size standards, except for the SBIC program as discussed above.
| Program | CFR site | Inflation adjusted size standard | ||
|---|---|---|---|---|
| Current standard | New standard | |||
| 504 Program | $6.0M | Net Worth | $7.0M | |
| $2.0M | Net Income | $2.5M | ||
| Surety Bond Guarantee Assistance | $5.0M | Average Annual Receipts | $6.0M | |
| Sales of Government Property (Except, Timber Sales Program, the Special Salvage Timber Sales Program, the sale of Government petroleum coal, and uranium.) | $2.0M | Average Annual Receipts | $6.0M | |
| For concerns not primarily engaged in manufacturing (Manufacturing firms have an employee-based size standard) | ||||
| Stockpile Purchases | $42.0M | Average Annual Receipt | $48.5M |
Justification for Publication as an Interim Final Rule
In general, SBA publishes a rule for public comment before issuing a final rule, in accordance with the Administrative Procedure Act and SBA regulations. 5 U.S.C. 553 and 13 CFR 101.108. The Administrative Procedure Act provides an exception to this standard rulemaking process, however, where an agency finds good cause to adopt a rule without prior public participation. 5 U.S.C. 553(b)(3)(B). The good cause requirement is satisfied when prior public participation is impracticable, unnecessary, or contrary to the public interest. Under such circumstances, an agency may publish an interim final rule without soliciting public comment.
In enacting the good cause exception to standard rulemaking procedures, Congress recognized that emergency situations may arise where an agency must issue a rule without public participation. On September 16, 2001, the President declared a national emergency as a result of the events of September 11, 2001. The events of that day have impacted U.S. businesses both in the declared disaster areas and across the nation. Most of the affected businesses qualify as small under existing SBA size standards and are eligible for SBA and other Federal assistance. However, some of the affected businesses had previously lost their small size status solely as a result of the inflation that has occurred since SBA last revised the size standards in 1994. A proposed inflationary adjustment to the size regulations to restore eligibility to those businesses was already under development at SBA when the tragic events of September 11, 2001, occurred. SBA now believes that any delay in the adoption of those inflationary adjustments could cause serious harm to those businesses.
Accordingly, SBA finds that good cause exists to publish this rule as an interim final rule in light of the urgent need to make disaster loans and other SBA assistance available to businesses that should be considered small, but that do not qualify under SBA's existing size standards. Advance solicitation of comments for this rulemaking would be impracticable and contrary to the public interest, as it would delay the delivery of critical assistance to these businesses by a minimum of three to six months. Any such delay would be extremely prejudicial to the affected businesses. It is likely that some would be forced to cease operations before a rule could be promulgated under standard notice and comment rulemaking procedures.
Furthermore, SBA has a statutory obligation to act in the public interest in determining eligibility for Federal assistance under the Small Business Act. 15 USC 633(d). Pursuant to that authority, SBA has determined that it is in the public interest to give immediate effect to SBA's current determination of small size status and that it would be impracticable to delay such implementation. SBA also notes the failure to adopt this rule immediately would work to the detriment of many small businesses.
Although this rule is being published as an interim final rule, comments are hereby solicited from interested members of the public. These comments must be received on or before February 22, 2002. SBA may then consider these comments in making any necessary revisions to these regulations.
Pursuant to Public Law 107-117 (Department of Defense and Emergency Supplemental Appropriations for Recovery from and Response to Terrorist Attacks on the United States Act), SBA has the authority to apply the size standards in this rule for purposes of eligibility for economic injury disaster loans to small businesses located in the disaster areas declared as a result of the terrorist attacks of September 11, 2001. Accordingly, for that purpose only, SBA is applying these size standards as if they were in effect on September 11, 2001.
Compliance With Executive Orders 12866, 12988, and 13132, the Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork Reduction Act (44 U.S.C. Ch. 35)
The Office of Management and Budget (OMB) reviewed this rule as a “significant regulatory action” under section 3(f) under Executive Order 12866.
For purposes of Executive Order 12988, SBA has determined that this rule is drafted, to the extent practicable, in accordance with the standards set forth in section 3 of that Order.
This regulation will not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibility among the various levels of government. Therefore, under Executive Order 13132, SBA determines that this rule does not have sufficient federalism implications to warrant the preparation of a Federalism Assessment.
This rule does not impose any new information collection requirements from SBA which require the approval by OMB under the Paperwork Reduction Act of 1980, 44 U.S.C. 3501-3520.
Under the Regulatory Flexibility Act (RFA), this rule may have a significant impact on a substantial number of small entities. Immediately below, SBA sets forth an initial regulatory flexibility analysis (IRFA) of this rule addressing the reasons and objectives of the rule; SBA's description and estimate of the number of small entities to which the rule will apply; the projected reporting, record keeping, and other compliance requirements of the rule; the relevant Federal rules which may duplicate, overlap or conflict with the rule; and alternatives considered by SBA.
(1) What Is Reason for This Action?
As discussed in the supplemental information, the purpose of this rule is to restore the small business eligibility of businesses who have grown above the size standard due to inflation rather than to an expansion of business activity. A review of the latest available inflation indices show inflation that has increased a sufficient amount to warrant an increase to the current receipt-based size standards.
(2) What Are the Objectives and Legal Basis for the Rule?
The revision to the receipt-based size standards for inflation more appropriately defines the size of businesses in these industries that SBA believes should be eligible for Federal small business assistance programs. Section 3(a) of the Small Business Act (15 U.S.C. 632(a)) gives SBA the authority to establish and change size standards.
(3) What Is SBA's Description and Estimate of the Number of Small Entities to Which the Rule Will Apply?
SBA estimates that there will be approximately 8,600 newly designated small business, distributed as follows by NAICS Sectors and Subsectors:
Estimate of Firms Gaining Small Business Status
| Number of firms | Associated annual sales | |
|---|---|---|
| • Retail | ||
| Sectors 44-45 | 2,800 | $17 billion. |
| • Services | ||
| Sectors 51, 52, 54, 55, 61, 62, 71, 72, 81, and Subsectors 531, 532, 561 | 4,000 | $22 billion. |
| • Finance, Insurance and Real Estate | ||
| Sectors 52-53 | 600 | $3 billion. |
| • Transportation & Utilities | ||
| Sectors 22 & 48 | 450 | $3 billion. |
| • Construction and Refuse | ||
| Sector 23 & Subsector 562 | 760 | $10 billion. |
| Total | 8,610 | $55 billion. |
| Source: 1997 Economic Census, U.S. Census Bureau, Special Tabulation for SBA. Sales estimates restated to 2000 dollars. |
The percentage increase in the number of small businesses that will result from this rule, compared to the existing base of small businesses, is estimated to be about two-tenths of one percent. The special tabulation of the 1997 Economic Census for SBA reports 5,082,970 total firms in the U.S. economy as defined by this census. We estimate that 98.4% of all businesses in the U.S. are currently defined as small under the existing size standards. Under the rule, this will increase to 98.6%. The percentage increase of annual sales in the U.S. economy attributed to these new small businesses is likely to be approximately seven-tenths of one percent. This will be applied to a base of 28.6%. Thus under this proposal the percent of sales attributed to firms defined as small businesses in the U.S. is likely to increase to 29.3%.
Description of Potential Benefits of the Rule: The most significant benefit to businesses obtaining small business status as a result of this rule is their eligibility for Federal small business assistance programs. These include SBA's financial assistance programs and Federal procurement preference programs for small businesses, 8(a) firms, small disadvantaged businesses, and small businesses located in Historically Underutilized Business Zones (HUBZone).
SBA estimates that approximately $46.2 million of additional Federal contracts will be awarded to firms becoming newly designated small businesses. As stated above, the percentage increase of annual sales attributed to these new small businesses is likely to be approximately seven-tenths of one percent. SBA applied this factor to the Fiscal Year 1999 total small business prime contractor initial awards which totaled $6.6 billion [$6.6B x .007 (.7 of 1%) = $46.2M].
We view the additional amount of contract activity as the potential amount of transfer from non-small to newly designated small firms. This does not represent the creation of new contracting activity by the Federal government, merely a possible reallocation or transfer to different sized firms.
Under the SBA's 7(a) Guaranteed Loan Program and Certified Development Company (504) Program, SBA estimates that approximately $17 million in new Federal loan guarantees could be made to these newly defined small businesses. This represents 0.19% of the $9 billion in loans that were guaranteed by the SBA under these two financial programs to firms in industries with monetary-based size standards.
Considering that the average size of firms gaining small business status will be $6 million, demand for assistance will likely be less than the overall participation rate for SBA loans among firms of all sizes. In any given year less than 1% of all small businesses receive SBA financing. Since larger firms are less likely to seek SBA financial assistance, we believe that no more than one-half of 1% of the 8,610 newly designated small businesses would seek SBA assistance. SBA estimates that approximately 45 out of the 8,610 firms would seek SBA financing. SBA financial assistance recipients of this size on average obtain assistance worth $375,000, so the impact in terms of new loans generated is estimated to be $17 million per year.
(4) Will This Rule Impose Any Additional Reporting or Record Keeping Requirements on Small Businesses?
This rule does not impose any new information collection requirements from SBA which require approval by OMB under the Paperwork Reduction Act of 1980, 44 U.S.C. 3501-3520. A new size standard does not impose any additional reporting, record keeping or compliance requirements on small entities. Increasing size standards expands access to SBA programs that assist small businesses, but does not impose a regulatory burden as they neither regulate nor control business behavior.
(5) What Are the Relevant Federal Rules Which May Duplicate, Overlap or Conflict With This Rule?
This rule overlaps other Federal rules that use SBA's size standards to define a small business. Under § 632(a)(2)(C) of the Small Business Act, unless specifically authorized by statute, Federal agencies must use SBA's size standards to define a small business. In 1995, SBA published in the Federal Register a list of statutory and regulatory size standards that identified the application of SBA's size standards as well as other size standards used by Federal agencies (60 FR 57988-57991, dated November 24, 1995). SBA is not aware of any Federal rule that would duplicate or conflict with establishing size standards.
SBA cannot estimate the impact of a size standard change on each and every Federal program that uses its size standards. In cases where an SBA's size standard is not appropriate, the Small Business Act and SBA's regulations allow Federal agencies to develop different size standards with the approval of the SBA Administrator (13 CFR 121.902). For purposes of a regulatory flexibility analysis, agencies must consult with SBA's Office of Advocacy when developing different size standards for their programs.
(6) What Alternatives Did SBA Consider?
SBA considered two alternatives to this rule. First, to wait until inflation has increased a greater amount before proposing an adjustment to receipt-based size standards. Previous inflation adjustments ranged between 48 percent to 100 percent. SBA believes that more frequent adjustments are necessary since smaller amounts of inflation can change the small business eligibility of a large number of businesses.
Second, SBA considered a policy of automatically adjusting size standards for inflation on a fixed schedule. SBA believes inflation must be closely monitored to assess the impact of inflation on size standards. Automatic adjustments may lead to inappropriate changes to size standards and prevent the Agency from taking into consideration other factors that bear on the review of size standards, such as changes in industry structure or Administration policies. Furthermore, an automatic adjustment could require SBA to make insignificant changes (i.e., 1 percent) or to wait a longer period of time than necessary to adjust size standards if inflation rapidly increases.
List of Subjects in 13 CFR Part 121
- Administrative practice and procedure
- Government procurement
- Government property
- Grant programs—business
- Loan programs—business
- Reporting and recordkeeping requirements
- Small business
PART 121—SMALL BUSINESS SIZE REGULATIONS
1. The authority citation for part 121 continues to read as follows:
Authority: 15 U.S.C. 632(a), 634(b)(6), 637(a), 644(c), and 662(5); and sec. 304, Pub. L. 103-403,108 Stat. 4175, 4188.
2. Amend § 121.102 as follows:
a. Redesignate the current paragraph (c) as (d).
b. Add new paragraph (c) to read as follows:
(c) As part of its review of size standards, SBA's Office of Size Standards will examine the impact of inflation on monetary-based size standards (e.g., receipts, net income, assets) at least once every five years and submit a report to the Administrator or designee. If SBA finds that inflation has significantly eroded the value of the monetary-based size standards, it will issue a proposed rule to increase size standards.
3. In § 121.201, revise the referenced NAICS Codes and size standards in the table “Size Standards by NAICS Industry” under Sectors 11, 21 through 23, 44-45, 48-49, 51 through 56, 61, 62, 71, 72, and 81 to read as follows:
Size Standards by NAICS Industry
4. Amend § 121.301 as follows:
a. In paragraph (b)(2), remove “$6 million” and add in its place “$7 million,” and “$2 million” and add in its place “$2.5 million,” respectively.
b. In paragraph (d)(1), remove “$5.0 million” and add in its place “$6.0 million.”
5. In § 121.502(a)(2), remove “$2 million” and add in its place “$6.0 million.”
6. In § 121.512(b), remove “$42 million” and add in its place “$48.5 million.”
Dated: January 3, 2002.
Hector V. Barreto,
Administrator.
[FR Doc. 02-1312 Filed 1-22-02; 8:45 am]
BILLING CODE 8025-01-P