Small Business Development Centers: Reevaluation of How SBA Sets Initial Funding Estimate Needed to Help Reduce Burden

SBA's SBDC Program provides training and counseling to small businesses through a nationwide network of 62 lead centers and more than 900 service centers. Each year, SBDC lead centers submit grant applications based on an estimated amount in SBA's funding opportunity announcement.

GAO was asked to review SBA's procedure for the SBDC funding estimate. This report discusses SBA's change to the way it estimates funding in the funding opportunity announcement, its rationale for the change, and views of SBDC grantees on the effect of the change on their budgeting and operations.

GAO reviewed SBDC funding opportunity announcements, Presidents' budget requests, and appropriations for fiscal years 2012–2020; examined relevant laws and guidance; and interviewed SBA officials and OMB staff. GAO also reviewed documentation and interviewed officials from a nongeneralizable sample of eight SBDCs (selected to achieve diversity in funding amount, budget cycle, and host institution) and surveyed all 62 lead SBDCs.

The Small Business Administration (SBA) annually issues a funding opportunity announcement with an estimate of total funding for the Small Business Development Center (SBDC) Program. Individual SBDCs are required to use this estimate to apply for their portion of the funding. In fiscal year 2016, SBA began using the lowest funding estimate—the amount in the President's budget—rather than an estimate reflecting historical funding levels. In fiscal year 2019, the amount in the President's budget was 15 percent lower than the prior-year appropriation and in 2020, 23 percent. If SBA continues its practice for fiscal year 2021, the funding estimate will be 35 percent lower than the 2020 appropriation. When appropriations are enacted for the program, the funding amount is revised and SBDCs submit a final budget.

SBA officials said they changed how they set the funding estimate to conform to federal standards and appropriations law.

In a 2019 letter to the House and Senate Small Business Committees, SBA said it adopted the change to help the program operate more effectively and be consistent with federal financial management standards. SBA officials could not point to specific regulations or guidance to support this statement. Office of Management and Budget (OMB) guidance for grants states that estimates based on the previous year's funding are acceptable if current appropriations are not yet available, as was the case when recent SBDC funding opportunity announcements were issued.

SBA officials also cited the Antideficiency Act, which prohibits federal agencies from obligating or expending federal funds in advance or in excess of an appropriation. But staff from OMB and SBA's Office of General Counsel told GAO that the Antideficiency Act does not apply to a funding opportunity announcement because the announcement does not obligate federal funds.

A majority of SBDCs that GAO surveyed said using the President's budget request for the initial funding estimate created budgeting, operational, and performance burdens and challenges—mostly stemming from the large gap between the initial estimate and appropriated amounts. For example, SBDCs surveyed said that they now

spend more time on budgeting (determining what to cut from initial budgets to meet the lower estimate and then recalculating for final budgets);

have a harder time obtaining matching funds (from state, local, or private-sector sources) or increasing the amounts from initial to final funding levels;

have difficulty hiring or retaining staff;

face challenges providing services to small businesses (particularly if SBDCs have staffing gaps); and

thus also face challenges meeting performance goals (which include number of clients served).

Under SBA's current practice for funding estimates, SBDCs will continue to experience (or may experience increasing) challenges given the growing divergence between the initial estimate and appropriated amounts.

GAO is making one recommendation that SBA reevaluate its funding application requirements, including the initial funding estimate SBDCs are to use. SBA partially agreed and outlined steps it plans to take that could address the intent of the recommendation.

The mission of the Small Business Administration’s (SBA) Office of  Entrepreneurial Development is to help small businesses start, grow, and  compete in global markets. The office oversees programs that include  the Small Business Development Center (SBDC) Program, which funds a  network of 62 lead centers and more than 900 service centers that offer  counseling, training, and technical assistance to current and prospective  small businesses.

SBDCs are funded by grants from SBA and matching funds from  nonfederal sources. Before the beginning of a new fiscal year, SBA  publishes a funding opportunity announcement that includes an overall  funding estimate for the program for the upcoming fiscal year (funding  estimate). Each SBDC lead center that wishes to apply for funding must  submit an application based on the SBDC’s proportionate share of this  amount.

In recent years, SBA changed the methodology it uses to determine the  funding estimate. For fiscal year 2020, SBA used the amount requested in the President’s proposed budget ($101 million) for the funding  estimate. Congress ultimately appropriated $135 million for the program.

You asked us to review SBA’s procedure for determining the SBDC  funding estimate. This report discusses (1) SBA’s rationale for changing  the way it estimates funding in the annual SBDC funding opportunity  announcement and (2) views of SBDC grantees on the effect of that  change on their budgeting and operations.

For the first objective, we reviewed SBDC funding opportunity  announcements for fiscal years 2012 through 2020 and associated  program guidance. We compared funding estimates, appropriations, and  Presidents’ budget requests from fiscal years 2012 through 2020. We  also interviewed SBA officials to obtain the agency’s rationale for  changing the way it estimates the funding amount in its SBDC funding  opportunity announcements. We examined select laws, regulations, and  Office of Management and Budget (OMB) guidance related to agency  budgeting and obligation and expenditure of federal funds, and reviewed  documentation on other selected programs to compare how funding  estimates are determined.

For the second objective, we reviewed funding application documentation  from a nongeneralizable sample of eight SBDC lead centers. We selected  these centers to achieve diversity in funding amount, budget cycle, and  host institution, and we interviewed center representatives about the  change in the funding estimate methodology. We also distributed a  survey to all 62 SBDC lead centers to obtain their perspectives on the  effect of the change on their operations. Sixty of the 62 lead centers (97  percent) responded to the survey. Appendix I describes our scope and  methodology in greater detail.

We conducted this performance audit from October 2019 to May 2020 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

As SBA’s largest matching grant program, the SBDC Program provides  funding to SBDCs to deliver business advising and technical assistance  to prospective and existing small businesses. SBDC lead centers  manage the program, including submitting annual funding applications.  Approximately two-thirds of SBDCs are funded on a calendar-year basis  and the rest on a fiscal-year basis. Universities, community colleges, or  state governments host SBDC lead centers.

SBA provides grants covering 50 percent or less of SBDC program costs.  As a condition of the grant, SBDCs are required to provide 100 percent  matching funds from nonfederal sources (one nonfederal dollar for each  federal dollar provided by SBA), which are used to cover remaining  program costs. At least 50 percent of the match must be in cash and the  remaining amount can include combinations of additional cash, in-kind  contributions, or waived indirect costs. Organizations that provide  matching contributions include state legislatures, private-sector  foundations, state and local chambers of commerce, economic  development entities, and colleges or universities. SBA considers  expenditures of nonfederal funds that an SBDC spends on the program in  excess of the statutorily required match as “overmatch.” SBA generally  reimburses SBDCs for allowable program costs, up to the amount of the  federal award and provided such costs adhere to the budget approved by  SBA.

As with other federal programs, the President submits a budget request to  Congress for the SBDC Program in or around February of each year, and  Congress thereafter engages in its appropriations process. In or around  July of each year, SBA publishes a funding opportunity announcement for  the SBDC Program. This announcement includes a funding estimate  (because the final appropriation is not known at this time) for awards to  be made by SBA during the upcoming fiscal year, which begins on  October 1.

Each SBDC submits an initial application for funding based on its  proportional share of the funding estimate. The application must  include detailed budgets setting forth program costs, broken out  separately for the SBDC and each of the service centers it oversees.  If the appropriation were to match the initial funding estimate, SBDCs  would be required to adhere to the budgets they initially submitted or  request approval for a modification from SBA.

If a continuing resolution is in place, SBA awards partial funding to the  SBDCs based on amounts available under the continuing resolution  and apportioned by OMB. According to SBA officials, SBDCs are  required to submit revised budgets after a continuing resolution.

After appropriations are enacted for the full year, the funding amounts  for the SBDC Program are revised and SBDCs submit a final, revised  budget.

SBDCs are informed of funding decisions through a notice of award that  includes the budget approved by SBA and the other terms and conditions  under which the award is made.

We previously reported on the effects of budget uncertainties and  disruptions. In a February 2018 testimony, we noted that Congress  annually faces difficult decisions on what to fund among competing  priorities and interests, and often postpones final funding decisions to  allow additional time for deliberations. Under a continuing resolution,  agencies can continue to operate, but the funding expires on a certain  date and therefore creates uncertainty about both the timing of final  appropriations and the level of funding ultimately available. And when a  lapse in appropriations—or funding gap—is possible, the affected  agencies must prepare for an orderly shutdown of operations, even if a  shutdown is ultimately averted. In the same testimony, we reported that  continuing resolutions and lapses in appropriations leading to government  shutdowns created inefficiencies and other management challenges for  agencies, such as delayed hiring and additional work.

Agency Budgeting and Obligation and Expenditure of Federal Funds

The following are select statutes, guidance, and regulations that govern  agency budgeting and obligation and expenditure of federal funds,  including for the SBDC Program:

Antideficiency Act. This act prohibits agencies from obligating or  expending funds in excess or in advance of an available appropriation  unless otherwise authorized by law and, with some exceptions, from  accepting voluntary services for the United States.

Impoundment Control Act. An impoundment is any action or  inaction by an officer or employee of the federal government that  precludes obligation or expenditure of budget authority. When  Congress appropriates funds to the executive branch, the President,  unless otherwise authorized to withhold such amounts, must prudently  obligate them. The Impoundment Control Act is rooted in this  principle, and grants the President strictly circumscribed authority to  temporarily withhold funds from obligation by transmitting a special  message pursuant to procedures established by the act. Transmission  of a special message is the only mechanism through which an agency  may withhold budget authority from obligation.

Uniform Administrative Requirements, Cost Principles, and Audit  Requirements for Federal Awards, 2 CFR Part 200 (Uniform  Guidance), is meant to provide a government-wide framework for  grants management and to reduce administrative burden for  nonfederal entities receiving federal awards while reducing the  risk of waste, fraud, and abuse. To comply with the Uniform  Guidance, federal agencies are responsible for developing  requirements for grant applicants and recipients of their program  awards, with consultation with OMB’s Office of Information and  Regulatory Affairs. Under the Uniform Guidance, federal agencies  must provide the projected total amount of funds available for  programs providing federal financial assistance, and this amount  is then made publically available. Estimates based on the previous  year’s funding are acceptable if current appropriations are not yet  available. In addition, federal agencies must publically announce  specific funding opportunities. These announcements must  include sufficient information to help an applicant make an  informed decision about whether to apply, such as the total  amount of funding the agency expects to award through the  announcement. SBA has adopted the Uniform Guidance,  thereby giving regulatory effect to the guidance with respect to  SBA awards.

Preparation, Submission, and Execution of the Budget, OMB  Circular No. A-11, contains instructions and schedules for agency  submission of budget requests and justification materials to OMB.  It provides agencies with an overview of applicable budgetary  laws, policies for the preparation and submission of agency  budgets, and information on financial management and budget  data systems.

Statutory funding formula for SBDCs. The amount of an SBDC  formula grant received by a state is determined by a statutory formula.  The formula divides the annual amount made available for the entire  SBDC Program—for the fiscal year the grant begins—on a pro rata  basis, based on the population of each state and subject to minimum  funding levels specified in statute. The maximum grant amount for  each recipient (SBDC) is the greater of the minimum statutory  amount, or their pro rata share of all SBDC grants as determined by  the statutory formula.

SBA Changed Its SBDC Funding Estimate Methodology to Align with Standards and Statute but Neither Required the Change

SBA Changed Its SBDC Funding Estimate Methodology in Fiscal Year 2016

In fiscal year 2016, SBA changed the methodology it used for the  estimate in the SBDC funding opportunity announcement. Before fiscal  year 2016, SBA officials stated that the agency used the prior year’s  appropriated amount for the program as the funding estimate in the  funding opportunity announcement. However, we found that this was not  always the case. The funding estimates in fiscal years 2012 through 2014  ranged from $2 million to $10 million lower than the prior year’s  appropriation (see fig. 1). The officials were unable to provide information  on the justification for the different pre-2016 practices, stating that no  officials involved in such determinations during those years remained at  the agency.

Since fiscal year 2016, SBA has instructed SBDC grantees to submit their  funding applications for the upcoming year based on the President’s  budget request.

In fiscal year 2016, the prior year’s appropriation and the President’s  budget request were the same—$115 million—and the final  appropriated amount was $117 million.

In fiscal year 2017, the President’s budget request of $115 million was  slightly lower than the prior year’s appropriation of $117 million, and  the final appropriated amount increased to $125 million.

Beginning in fiscal year 2018, the funding estimate and the prior  year’s appropriation began to diverge significantly (funding estimates  decreased, appropriations increased). In that year, SBDCs were  required to submit funding applications based on a funding estimate of  $110 million, which was 12 percent lower than the prior-year  appropriation of $125 million. The final appropriated amount increased  to $130 million.

In fiscal year 2019, the funding estimate was $110 million, 15 percent  lower than the prior-year’s appropriation of $130 million. The final  appropriated amount increased to $131 million.

By fiscal year 2020, SBDCs were required to submit funding  applications based on the President’s budget request of $101 million,  which was 23 percent lower than the prior year’s appropriation. The  final appropriated amount increased to $135 million.

If SBA continues this practice for fiscal year 2021, SBDCs will be  required to submit funding applications at a level that is 35 percent  lower than the 2020 appropriation, in order to match the President’s  budget request of $87.9 million (13 percent lower than the President’s  budget request for fiscal year 2020).

SBA Said It Changed the Funding Estimate Methodology to Conform with Financial Management Standards and Antideficiency Act, but Neither Required the Change

SBA cited two reasons for changing the way it estimates funding in the  annual funding opportunity announcement: to conform to federal financial  management practices and to address concerns about violating the  Antideficiency Act.

SBA officials cited federal financial management practices as one reason  for changing the funding estimate methodology. The officials stated that it  was a management decision to use the only known amount, the number  in the President’s budget, for the funding opportunity announcement.  They noted that the difference between the Senate and House markups  for fiscal year 2020 exceeded $20 million. SBA officials also told us that  they rely on the lowest estimate available to be prudent with taxpayer  dollars.

According to a December 2019 letter from SBA to the Senate and House  Small Business Committees, the change to the funding estimate  methodology was adopted when the SBDC Program office identified  areas requiring process improvements and stronger internal controls to  help the program operate and plan more effectively and efficiently and in  consistency with federal financial management standards. SBA’s letter  also stated that it is standard federal financial management practice to  plan to the lowest budget estimate in the absence of a full-year  appropriation, and SBA therefore provided the President’s budget to  SBDCs for planning purposes.

Although SBA characterized its use of the President’s budget as a  standard practice within the federal government, SBA officials did not  point to a specific regulation or guidance to support this view, either in the  letter or in our interviews. OMB’s Uniform Guidance does not advise  federal agencies to use the lowest estimate (that is, the lowest among the  House mark, Senate mark, President’s budget request, and the prior  year’s appropriation) when reporting funding available under federal  financial assistance programs. Rather, the guidance states that estimates  based on the previous year’s funding are acceptable if the current  appropriations are not yet available, as was the case when recent SBDC  funding opportunity announcements were issued. Although OMB’s  Uniform Guidance does not identify any other accepted practice in this  regard, it does not expressly prohibit other practices.

OMB staff told us that, in the absence of a full-year appropriation, it is  permissible for agencies to use the lowest estimate as the funding  estimate in a funding opportunity announcement. The staff said that from  their perspective, SBA’s use of the figure in the President’s budget is  consistent with OMB Circular A-11 and the Uniform Guidance. However,  they also acknowledged that there is no requirement to use the lowest  estimate in a funding opportunity announcement. They also said that  practices vary across agencies.

During our limited review of other SBA and federal award programs, we  did not find other programs that had funding application practices similar  to those for SBDCs. However, those programs may not be entirely  comparable to the SBDC Program, which publishes its funding  opportunity announcement before the annual appropriation is known,  requires applicants to initially apply based on a funding estimate, and is  subject to a statutory formula that calculates individual grant amounts  based on the final appropriation. The following are examples of ways in  which the programs we reviewed differed from the SBDC Program:

According to SBA officials, the funding for its Women’s Business  Centers is awarded at the end of the fiscal year, and thus the final  appropriation is known during the application process.

In a fiscal year 2018 funding opportunity announcement for SBA’s  Veterans Business Outreach Center Program, the total amount of  available funding was known at the time applicants submitted their  proposals.

Like the Veterans Business Outreach Center Program, a fiscal year  2018 funding opportunity announcement for SBA’s Federal and State  Technology Partnership Program listed the amount of funding  available.

Applicants for the Defense Logistics Agency’s Procurement Technical  Assistance Program (PTAP) can apply for specific amounts of funding  based on their service areas. For example, in a fiscal year 2020  funding announcement for PTAP, applicants providing statewide  coverage could apply for up to $1 million in funding and those  providing less than statewide coverage could apply for up to  $600,000. In addition, the funding announcement did not include a  funding estimate for the program as a whole.

SBDC Program officials also cited adherence to the Antideficiency Act as  a reason for the change. SBA stated in its letter to the Senate and House  Small Business Committees that its practice of providing SBDCs with the  President’s annual budget request as the dollar amount for planning  purposes ensures that SBA abides by the terms of the Antideficiency Act.  In doing so, they noted the Antideficiency Act prohibits obligating or  expending funds in excess of amounts available through appropriations.  In interviews, SBA officials said that if they consistently took a  conservative approach, they would be less likely to violate the  Antideficiency Act when appropriations were enacted.

However, OMB staff told us that SBA’s use of other estimates in a funding  opportunity announcement would not violate the Antideficiency Act. SBA’s  funding opportunity announcements make clear that funding awards will  be based on the appropriated level of funding, not the estimate provided  in the funding opportunity announcement. OMB staff told us that because  SBA’s funding opportunity announcement does not obligate the federal  government, it does not present the potential for a violation of the  Antideficiency Act. They further stated that using a higher amount, such  as the prior year’s appropriation, also would not violate the Antideficiency  Act.

Consistent with that position, SBA’s Office of General Counsel agreed  that the Antideficiency Act does not apply to the SBDC funding  opportunity announcement because it does not create an obligation on  behalf of SBA. Counsel also stated that SBA’s decision to use the  President’s budget as the funding estimate was a management decision  and was not required by the Office of the General Counsel.

SBDCs Said Change to Funding Estimate Methodology Hindered Budgeting, Operations, and Services

Most SBDCs that responded to our survey told us that using the lowest  budget estimate—the President’s budget request—as the funding  estimate for fiscal year 2020 had created budgeting, operational, and  performance burdens and challenges. The burdens and challenges  largely stemmed from the large gap between the initial funding estimates  and final appropriations.

According to SBA officials, using the amount in the President’s budget as  the funding estimate should not negatively affect SBDCs that are on a  calendar-year budget cycle (approximately two-thirds of SBDCs) because  they have approved funding through December 31 of each year. They  stated that by January 1 of each year, there is either a budget or  continuing resolution in place that eliminates uncertainty for these  SBDCs. They also stated that SBDCs on a calendar-year cycle are not  required to submit their initial applications based on the estimated funding  amount in the funding opportunity announcement (that is, the amount in  the President’s budget), and can instead use a higher amount under a  continuing resolution or other approved budget. However, SBA did not  provide any documentation authorizing SBDCs on a calendar-year budget  cycle to submit initial applications using a higher estimated funding  amount. Rather, the fiscal year 2020 Funding Opportunity Announcement  states that the funding estimate will be based on the President’s budget,  and the announcement applies to both fiscal-year and calendar-year  SBDCs.

Lastly, SBA’s view that calendar-year SBDCs should not be negatively  affected by SBA’s use of the lowest budget estimate is not consistent with  SBDC responses to our survey. Both fiscal-year and calendar-year  SBDCs reported in their survey responses that using SBA’s funding  estimate had hindered different aspects of their operations. In the  following discussion of these and other survey results, we note the limited  instances in which calendar-year SBDCs reported a different experience  than fiscal-year SBDCs.

SBDCs Said Funding Estimate Impeded Efficient Administration and Budgeting

The vast majority of SBDCs responding to our survey said the large gap  between the initial funding estimates and final appropriations imposed an  additional administrative burden for SBDCs as they developed their  budgets. Fifty-one out of 58 SBDCs (88 percent) responding to our  survey question estimated that staff time to prepare the initial and final  2020 funding applications was somewhat or greatly increased compared  to previous years (when the estimated funding amount was approximately  the same as the current year’s award).

Many SBDCs noted that using SBA’s funding estimate for fiscal year  2020 had created an additional administrative burden in their responses  to open-ended questions on our survey. For example, one SBDC said  that requiring two budget justifications (an initial funding application and a  revised application) added time, complexity, duplication of effort, and  considerable paperwork to the budgeting process. Another SBDC said  the process of submitting multiple budgets took extra time and increased  the likelihood of human error.

Survey comments help explain why the use of the lowest budget estimate  made budgeting more burdensome. For example, one SBDC explained  that the lower amount required more time for negotiations to assure their  matching partners that the actual number would likely be higher. Another  SBDC noted the lower funding estimate required more proposed budget  cuts in the initial application.

Most SBDCs said using the funding estimate in the 2020 Funding  Opportunity Announcement (which was $30 million below the 2019  appropriation and $34 million below the 2020 appropriation) required  them to propose cuts in their initial budgets. Forty of the 57 SBDCs (70  percent) that responded to the survey question said their initial budget  proposals eliminated some salaries, fringe benefits, and travel; 34 of 57  (60 percent) reduced supplies; and 33 of 57 (58 percent) reduced their  contractual obligations. See table 1 for a full breakdown.

Our survey asked SBDCs to provide a brief description of how they made  adjustments to account for the decrease in the estimated funding amount  in 2020:

Some SBDCs stated that they had zeroed out the lead center or one  or more service centers.

A few SBDCs said they eliminated all part-time staff. Some also told  us they decreased travel and professional development.

Some SBDCs moved contractual line items (such as rent and  software licenses) off the budget or reduced use of service providers  (such as business consultants and independent contractors).

Other survey respondents provided insight on why they made certain  proposed cuts. To limit the burden on its service centers, one SBDC  budgeted zero federal funds for the lead center and budgeted its service  centers at the prior year’s amount so that its service centers would only  need to budget once. Another SBDC stated that it chose the largest  single line item that could be quickly reduced to meet the funding  estimate. It noted that this allowed it to quickly scale down the budget and  would allow it to quickly scale the budget back up to “reality.”

Some of the survey respondents and SBDCs we interviewed indicated  that they did not expect to have to make the cuts they proposed in their  initial budgets because they were confident that Congress would  appropriate the same or more funding as the prior fiscal year.

One SBDC surveyed said that it took all budget deductions from the  lead office personnel, but that it would not do so in a final budget if the  lower amount in the President’s budget was to be appropriated.

Three SBDCs we interviewed said that to account for the decrease,  they proposed cuts in their initial budget they did not think they would  have to make, such as eliminating an entire service center or a core  information technology system.

One SBDC we interviewed described the process as putting together  two budgets simultaneously: one budget using the President’s budget  request and one budget that was based on a funding amount that it  believed was more consistent with historical norms.

Still other survey respondents reported that they actually reduced their  expenditures after receiving the funding estimate, although the amounts  ultimately appropriated for SBDCs in fiscal years 2019 and 2020 were  higher than for prior years. In response to the same open-ended question  asking for a brief description of how they made adjustments to account for  the decrease in the estimated funding amount in 2020, SBDCs provided  the following examples:

One SBDC said that to maintain all of its full-time personnel within the  constraints of the initial application, some of its service centers had to  stop providing training classes or attending conferences.

Another SBDC told us a key staff person was given a layoff notice.

Another said that due to the budget uncertainty, the SBDC eliminated  all travel, cancelled almost all of its business development software  subscriptions, and delayed replacing old computer equipment.

Thirty-eight of the 60 SBDCs that responded to our survey (63 percent)  said that using the initial funding amount as the basis for their initial  applications somewhat or greatly hindered their ability to obtain matching  funds. As discussed previously, SBDCs are required to match SBA  funding at a 1:1 ratio. Host institutions (often supplemented by local  governments, higher education institutions, and private-sector groups)  provide matching funding.

In response to open-ended survey questions, SBDCs noted the following:

Difficulty obtaining full matching funding. Some survey  respondents said that submitting a funding application based on the  initial estimate put the SBDC’s ability to secure 100 percent of  matching funding at risk. For example, one SBDC stated that the  initial funding amount was the basis for its host institution’s budget for  the match and that once the host’s budget was approved, it was  difficult to amend it to increase the match (to meet the 1:1  requirement). Another SBDC said that host institutions only contribute  a match equal to the federal allocation and that if the final allocation  amount is not known, the host may choose to invest in other  initiatives.

Negative effect on relationships. Most survey respondents  expressed concern that the change to the funding estimate would  create confusion or uncertainty with their hosts or service centers  (partners). For example, one SBDC told us that its host institutions  do not react well to ambiguity in planning. This SBDC described the  change in amounts between the initial estimate and the final  appropriation as an unwelcome surprise to its partners, which needed  to match the difference. Another SBDC noted that the decrease in the  initial funding amount in 2020 was so great that several funding  partners indicated they would partner with other organizations that  were better funded and supported.

Many survey respondents stated they were able to mitigate the impacts of  the lower funding estimate by using matching funds, either because their  host provided the same amount it had provided the previous year or  overmatched (provided funds in excess of the statutorily required match).  For example, one SBDC told us it was fortunate to have strong support  from its host to be able to temporarily fund program operations at full  capacity, until the revised funding amount from SBA was released.

Three survey respondents who reported that using the initial funding  amount neither helped nor hindered their efforts to obtain matching funds  either stated they did not share the estimated amount with their hosts or  local partners or that the amount they shared was equal to their portion of  the appropriated amount.

Forty-two of 60 SBDCs that responded (70 percent) said using the initial  funding amount as the basis for their initial applications somewhat or  greatly hindered their ability to spend grant funds.

In response to an open-ended survey question asking for examples of  how using the initial funding amount had affected their ability to spend  grant funds, SBDCs noted the following:

Having to spend conservatively early in the year. Some SBDCs  told us that the funding process requires them to spend conservatively  at the beginning of the budget cycle, only to ultimately receive more  than the prior year’s amount. As shown in figure 2, SBDCs did not  receive the notice of award for their full fiscal year 2019 appropriation  until April 2019. One SBDC noted the extreme pressure in the first  half of the year to operate on a lean budget and then having to switch  to increased activity in the second half of the year once the final,  higher amount was awarded. Another SBDC required its service  centers to propose special projects but did not fund them at the  beginning of the year because it did not know what the funding level  would be.

Having to carry over funding to the next year. Some SBDCs said it  has become common for them to have unexpended funding left at the  end of the fiscal or calendar year. In these instances, they carry over  their funding to the next year. For example, one SBDC said that the  late-in-year increases in funding prevented certain activities from  being completed within appropriate project dates and led them to  carry over funds. While the ability to carry over funding for one  additional fiscal year was considered helpful, some expressed  concern that this was not the best use of federal dollars over the  course of the year. For example, one SBDC said it was forced to  carry over unspent funds partly as a result of difficulties in forecasting  monthly spend rates and adjusting the rates midyear.

A few survey respondents noted that operating under a continuing  resolution at the beginning of the year made spending grant funds more  difficult. For example, one SBDC stated that multiple continuing  resolutions in one year meant that by the time its host rebudgeted, it had  less than 3 months to spend the increase. Another noted that because  the initial funding amount varied so greatly from the final amount, the  shortened time frame for deploying funds can make it difficult to maximize  use of grant funds.

Two SBDCs that operate on a calendar-year budget cycle told us that  they had not experienced the same challenges as SBDCs that operate on  a fiscal-year budget cycle because there is either a continuing resolution  or final award by January. A smaller proportion of calendar-year SBDCs  responded that using the initial funding amount somewhat or greatly  hindered their ability to spend grant funds compared to fiscal-year  SBDCs. However, the majority of calendar-year SBDCs still responded  that using the amount somewhat or greatly hindered their ability to spend  grant funds.

SBDCs Said Funding Estimate Created Operational and Planning Challenges

Forty-four of 60 SBDCs that responded to our survey (73 percent) said  using the initial funding amount as the basis for their initial applications  somewhat or greatly hindered their ability to hire personnel. As mentioned  previously (see table 1), 40 of the 57 SBDCs (70 percent) that responded  to the survey question about reducing budget items in their initial funding  application reduced salaries in their initial funding application.

In response to various open-ended questions in our survey, SBDCs noted  the following:

Hiring delays or freezes. Many SBDCs reported delays in hiring or  hiring freezes. For example, one SBDC told us it had to leave  vacant counseling positions unfilled, although it knew the funding for  those positions almost certainly would materialize. Another SBDC  noted that using SBA’s current funding estimate created a minimum of  a 6-month delay in hiring a new adviser at a local center. Another  SBDC said its host institution would not allow any staff to be hired in  the period from SBA issuance of the funding estimate through the  congressional appropriation. Thus, when consultants and staff retire  or leave the program, there is a staffing gap, which results in less  service to clients.

Reliance on short-term or contractor positions. Some SBDCs told  us that using the funding estimate already had forced them to rely on  or might force them to rely on part-time staff, short-term contracts, or  contractors to provide services. For example, one SBDC stated the  initial funding estimate restricted its ability to hire full-time personnel  and instead required it to hire part-time individuals. This SBDC also  noted it had a difficult time finding qualified individuals, since it could  not guarantee funding for the new position in 6 months. Another  SBDC said it was forced to put all personnel on short-term contracts.  Another SBDC opted to use contractors for specialized projects and  subject matter experts, rather than making a long-term investment in a  core business advisor, because those hires were more flexible in the  face of budget uncertainty.

In addition to difficulty in hiring personnel, 35 of 60 SBDCs that  responded to our survey (58 percent) said that using the initial funding  amount as the basis for their initial applications had somewhat or greatly  hindered their ability to retain personnel. In response to various open- ended questions in our survey, SBDCs cited morale and retention issues:

Staff morale. Some SBDCs said that using the lower funding  estimate had affected staff morale. Some respondents attributed this  decline in morale to the lack of job security and funding certainty. Two  others told us they withheld personnel management information from  their staff and other centers to minimize the impact on morale.

Staff retention. Some SBDCs noted that staff members left the  SBDC to seek employment elsewhere in response to the uncertainty  created by the lower initial funding amount. For example, one SBDC  said that for 6 months its staff heard about the uncertainty and lack of  a stable budget, which led to staff members leaving for other jobs. In  addition, a few SBDCs noted that they were unable to offer a  competitive salary. For example, one SBDC said that the initial  funding estimate dictates matching funding, which constricts its ability  to raise salaries to a competitive level.

Reduced Ability to Plan for New Operations

Survey respondents provided examples of how using the lower estimate  in the President’s budget as the basis for the SBDC funding estimate  negatively affected their ability to plan for new operations and expand  services.

Some SBDCs said they were not able to plan and promote a program  until far into the fiscal year when the final notice of award was  released. For example, one SBDC said it was very difficult to plan for  expansion because the initial funding amount was barely enough to  sustain operations.

Two SBDCs said they had delayed opening one or more centers. For  example, one SBDC said it would not be able to expand to additional  rural areas and instead only would be able to maintain existing  operations. The SBDC noted that it would have been able to expand  with the amount of funding it eventually received, if that funding had  been received at the start of the budget cycle and made available in a  predictable manner.

Two SBDCs stated that the funding ambiguity affects their host  institutions’ ability to plan their own budgets, which directly affects the  amount of matching funding they are able to provide.

SBDCs Said Funding Estimate Affected Their Ability to Meet Performance Goals and Serve Small Businesses

Reduced Ability to Meet Performance Goals

Thirty-one of 59 SBDCs that responded to the survey question (53  percent) said that using the initial funding amount as the basis for their  initial applications somewhat or greatly hindered their ability to meet  performance goals. SBDCs have four performance goals against which  they agree to be evaluated when applying for SBA funding—number of  jobs supported, number of new business starts, number of clients served,  and amount of capital infusion.

In response to an open-ended question that asked for examples of how  using the initial funding amount had affected their ability to meet  performance goals, many SBDCs pointed to the staffing difficulties discussed earlier as a reason for the increased difficulty in meeting  performance goals. Some SBDCs surveyed also mentioned that  performance goals did not decrease when the initial funding estimate was  lower than the prior year’s funding amount. One SBDC noted that its  goals are based on the assumption that the full funding amount will be  available over 12 months, rather than from 4 to 5 months after the start of  the year.

Thirty-five of 59 SBDCs that responded to the survey question (59  percent) said using the initial funding amount as the basis for their initial  applications somewhat or greatly hindered their ability to provide services.  As noted previously, the purpose of the SBDC Program is to deliver  business advising and technical assistance to prospective and existing  small businesses.

In response to an open-ended question that asked for examples of how  using the estimated funding amount affected their ability to provide  services, a few SBDCs mentioned the budget process took time away  from providing services. For example, one SBDC said that its time and  energy was split between the core mission and addressing budget  uncertainty. Similarly, another SBDC stated that the extensive funding  application work took time away from providing direct services to clients.  Two SBDCs also pointed to gaps in service created by the uncertain  funding situation. For example, one SBDC noted gaps in service delivery  in terms of geographic coverage and of expanding technology training for  clients because of the inconsistent budget environment.

Our Prior Work and Survey Responses Include Suggestions for Improvement

In prior work, we described legislative authorities and agency actions that  may mitigate challenges associated with budget uncertainties. For  example, in a 2018 testimony, we noted that Congress may include  specific provisions in continuing resolutions (called legislative anomalies)  that provide some agencies or programs with funding or direction different  from those specified in the standard provisions that require agencies to  spend more conservatively. For example, programs that previously  received a specific or additional amount of funding under a continuing  resolution have included wildfire management, veterans healthcare and  benefits, and disaster relief. In addition, agencies can take actions to  mitigate challenges associated with continuing resolutions and  shutdowns. For example, agencies may have the ability to shift grant  cycles to later in the fiscal year when they are less likely to be under a  continuing resolution. Shifting these cycles can help minimize disruption  of services.

In response to an open-ended survey question on how SBA could help  mitigate any of the challenges posed by the funding application  procedure, SBDCs offered a number of suggestions. Many recommended  that SBA allow SBDCs to submit funding applications at the prior year’s  appropriated amount, as generally had been the practice historically. As  noted previously, OMB’s Uniform Guidance offers SBA the flexibility to  use other estimates, such as the prior year’s appropriation. A few also  suggested a more streamlined process that does not involve multiple  funding applications (and budgets), but a process in which SBDCs submit  budgets only once. A few recommended 5-year funding for the program.

SBDCs face administrative burdens and operational challenges stemming  from SBA’s current practice of using the lowest budget estimate—the  amount in the President’s budget—as the funding estimate for SBDC  funding applications. More specifically, because of the large gap in recent  years between the President’s budget and appropriated amounts for the  program, SBDCs told us they now spend more time on budgeting, have a  harder time obtaining matching funds, and have difficulty hiring and  retaining staff. This in turn affected their ability to meet their performance  goals and program objectives of serving small businesses.

The use of continuing resolutions in recent years also has put strains on  SBDCs’ ability to effectively plan, budget, and operate throughout a year.  And if the funding estimates continue to decrease (as is already the case  for fiscal year 2021) and diverge from appropriations in such an  environment, SBDCs will face increased challenges in the areas cited  above.

SBA could take actions to alleviate some of the burden on SBDCs, in  particular by reevaluating its funding application requirements for the  SBDC Program. For example, the agency could reconsider the amount it  uses as the basis for the funding estimate. While SBA previously cited a  desire to improve operational efficiencies as a reason for changing the  funding estimate methodology, most SBDCs told us their operational  efficiencies have decreased. SBA also cited a need to align with federal  financial management standards, but OMB’s Uniform Guidance permits  the use of other estimates, such as the prior year’s appropriation. Lastly,  SBA cited concerns over violating the Antideficiency Act, but OMB staff  and SBA’s Office of General Counsel confirmed that the Antideficiency  Act does not present a barrier to using other estimates.

SBA might also reconsider other aspects of the funding application  process that cause burden, such as the timelines for submitting  applications and the number of times SBDCs must submit detailed  budgets.

We are making the following recommendation to SBA:  The Associate Administrator of the Office of Entrepreneurial Development  should reevaluate the SBDC funding application requirements, including  reexamining the funding estimate SBDCs are required to use and  considering other changes that could reduce administrative burdens on  SBDCs. (Recommendation 1)

We provided a draft of this product to SBA and OMB for their review and  comment. OMB did not provide comments. SBA provided written  comments that are reprinted in appendix III. In its written comments,  which are summarized below, SBA partially agreed with our  recommendation and recognized room for improvement in how it sets the  funding estimates for the SBDC Program.

SBA did not explicitly state with which part of our recommendation it  disagreed; rather, SBA reiterated its view that the agency’s practice of  planning to the more conservative President’s annual budget request  affects only fiscal-year SBDCs.

In addition, SBA listed two changes it was considering to improve the  funding application process. SBA first stated that it is exploring moving  the program start date for fiscal-year SBDCs to January 1, which would  make all SBDCs operate on a calendar-year basis. SBA also indicated  that it is considering publishing the fiscal year 2021 Funding Opportunity  Announcement later in the fall (for example, on the first day of October),  by which time the agency would be operating on a continuing resolution  or final appropriation and would no longer be working with funding  estimates. These steps are promising, but we would need to evaluate  their implementation to determine whether they fully address our  recommendation.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, the Administrator of SBA, the Acting Director  of OMB, and other interested parties. In addition, the report will be  available at no charge on the GAO website at https://gao.gov.

If you or your staff members have any questions about this report, please  contact William B. Shear at (202) 512-8678 or shearw@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs  maybe found on the last page of this report. Major contributors to this  report are listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

This report discusses the (1) Small Business Administration’s (SBA)  rationale for changing the way it estimates funding in the annual funding  opportunity announcement for the Small Business Development Center  (SBDC) Program and (2) views of SBDC grantees on the effect of that  change on their budgeting and operations.

To determine SBA’s rationale for changing the way it estimates funding in  the annual SBDC funding opportunity announcement, we reviewed SBDC  funding opportunity announcements for fiscal years 2012 through 2020  and program guidance that governs the SBDC funding application  procedure. We compared the funding estimates in the funding opportunity  announcements, appropriations, and Presidents’ budget requests from  fiscal years 2012 through 2020. We also interviewed SBA officials in the  SBDC program office and Office of General Counsel to obtain the  agency’s rationale for changing the way it estimates the funding amount  in its SBDC funding opportunity announcements.

In addition, we examined select laws (such as the Antideficiency Act) and  regulations (such as the Office of Management and Budget’s (OMB)  Uniform Administrative Requirements, Cost Principles, and Audit  Requirements for Federal Awards). We interviewed OMB staff and  officials in SBA’s Office of General Counsel to obtain their views on the  relevance of the Antideficiency Act and the extent to which SBA’s funding  proposal procedure is consistent with that law.

We also reviewed documentation on other selected programs to compare  the funding application processes used: the Women’s Business Center,  Veterans Business Outreach Center, Federal and State Technology  Partnership, and Procurement Technical Assistance Programs. We  selected these programs because they were other SBA grant programs or  because SBDCs we interviewed mentioned them as federal grant  programs that used different budget practices. (We discuss below how we  selected the SBDCs to interview.)

To gather the views of SBDC grantees on the effect of the funding  estimate change on their planning and operations, we interviewed  representatives of a nongeneralizable sample of eight SBDC lead  centers, selected to achieve diversity in funding amount, budget cycle,  and host institution. Their views are not generalizable to other SBDCs but  offered important perspectives. We also reviewed funding application  documentation from these eight lead centers to determine their funding  timelines. We then focused on the fiscal year 2019 timeline for SBDCs  that use a calendar-year budget cycle and SBDCs that use a fiscal-year  budget cycle to identify any differences in their timelines. We selected  fiscal year 2019 because it was the most current complete funding cycle  at the time we conducted our work.

In addition, we conducted a web-based survey of all 62 SBDC lead  centers to obtain their perspectives on the effect on their operations of the  change in how SBA estimates SBDC funding. In total, we obtained 60  responses (a 97 percent response rate). We conducted four pretests of  our draft questionnaire by telephone with officials at four SBDC lead  centers with varying characteristics, such as amount of funding, budget  cycle, and host institution. We used these pretests to help refine our  questions, develop new questions, clarify any ambiguous portions of the  survey, and identify any potentially biased questions, and we made  revisions as necessary.

We launched our web-based survey on January 30, 2020, and emailed  log-in information to the directors of the SBDC lead centers. The survey  was available through February 7, 2020. From February 10, 2020,  through February 14, 2020, we conducted follow-up with nonrespondents  by telephone and email. See appendix II for the full set of survey results.

The survey included both closed- and open-ended questions. To analyze  open-ended comments provided by the SBDCs that responded to the  survey, GAO analysts read the comments and developed categories for  the responses. An initial coder assigned a category that best summarized  the comments. A separate coder reviewed and verified the accuracy of  the initial categorizations. The initial coder and reviewer discussed orally  and in writing any disagreements about code assignments and  documented consensus on the final analysis results. For purposes of this  report, we used the following terms to describe the number of SBDCs (out  of 60) that were assigned to categories: “few” to describe three to five  SBDCs, “some” to describe six to 15, “many” to describe 16 to 30, “most”  to describe 31 to 45, and “vast majority” to describe 46 and over.

Appendix II: Results of GAO’s Survey of Small Business Development Centers

To obtain the views of Small Business Development Centers (SBDC) on  the Small Business Administration’s (SBA) change in the way it sets  funding estimates, we conducted a web-based survey of all 62 lead  SBDCs. Our survey comprised closed- and open-ended questions. This  appendix includes all survey questions and results of each closed-ended  question; it includes only the number of responses for each open-ended  question. We received surveys from 60 lead SBDCs (a 97 percent  response rate). The total number of responses to individual questions  may be fewer than 60, depending upon how many lead centers chose to  respond to a particular question. For a more detailed discussion of our  survey methodology, see appendix I.

For questions 7 through 13, the “initial funding amount” refers to your  SBDC’s portion of the estimated funding of $101 million total  available in the 2020 SBDC Funding Opportunity, which was  ultimately below the $135 million later authorized under the  Consolidated Appropriations Act, 2020, Pub. L. No. 116-93 (Dec. 20,  2019).  (Question 7a.) Please provide a specific example or examples of  how using the initial funding amount has affected your SBDC’s  ability to obtain matching funds.

We received 49 responses to this question.  (Question 8a.) Please provide a specific example or examples of  how using the initial funding amount has affected your SBDC’s  ability to spend grant funds.

We received 51 responses to this question.  (Question 9a.) Please provide a specific example or examples of  how using the initial funding amount has affected your SBDC’s  ability to retain personnel.

We received 49 responses to this question.  (Question 10a.) Please provide a specific example or examples of  how using the initial funding amount has affected your SBDC’s  ability to hire personnel.

We received 52 responses to this question.  (Question 11a.) Please provide a specific example or examples of  how using the initial funding amount has affected your SBDC’s  ability to ensure continuous operations.

We received 54 responses to this question.  (Question 12a.) Please provide a specific example or examples of  how using the initial funding amount has affected your SBDC’s  ability to meet performance goals.

We received 44 responses to this question.  (Question 13a.) Please provide a specific example or examples of  how using the initial funding amount has affected the ability of all  your centers to provide services.

We received 49 responses to this question.  (Question 14a.) Please provide a brief description of how your SBDC  made adjustments to account for the decrease in the estimated  funding amount in 2020.

We received 60 responses to this question.  (Question 19) How could SBA help mitigate any of the challenges  posed by the funding application procedure, if at all?

We received 56 responses to this question.  (Question 20) Is there anything else related to the current SBDC  funding application procedure on which you would like to elaborate?

We received 42 responses to this question.

Appendix III: Comments from the Small Business Administration

Appendix IV: GAO Contact and Staff Acknowledgments

In addition to the contact name above, Paige Smith (Assistant Director),  Meredith P. Graves (Analyst in Charge), Kristine Hassinger, Jill Lacey,  Jason Marshall, Marc Molino, Kirsten Noethen, and Barbara Roesmann  made significant contributions to this report.

The Small Business Administration (SBA) provides funding to Small Business Development Centers to train and counsel small businesses. Since FY 2016, SBA has used the President’s proposed budget to estimate funding for the following year.

For FY 2020, the President requested $101 million; Congress appropriated $135 million. The large gap between estimated and actual funding caused the centers to have to rework their budgets and made it harder to get the necessary matching funds and hire staff.

We recommended that SBA reevaluate how it sets initial funding estimates for the centers to use.