PANDEMIC PAYOUTS GONE WILD: "Due to [a] maelstrom of mismanagement [involving the Small Business Administration's pandemic programs], hundreds of billions of taxpayer dollars have been placed at undue risk."(ECONOMICS)

• Author: Yeatman, William

THE Small Business Administration (SBA) has been implementing two marquee programs as part of the Federal government's pandemic response: the $813,000,000,000 Paycheck Protection Program and the $367,000,000,000 Economic Injury Disaster Loan program.

To be sure, the Federal government faced an extraordinary challenge. Due to the very nature of the government's policy of quickly aiding those affected by COVID-19 and its economic effects, Federal relief programs were at an increased risk of improper payments. It may be that some level of waste is acceptable in an emergency, but the Small Business Administration's performance nevertheless undermines the case for "big government."

Both the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) program reflect gross expansions of frameworks that already were troubled before the pandemic, and then Congress and SBA removed safeguards to hasten funds out the door. Despite the absence of upfront controls, SBA failed to monitor against improper payments and fraud until after most of these programs' loans and guarantees had been disbursed. There is a steep taxpayer cost to this mismanagement: government watchdogs have identified more than $250,000,000.000 in potentially improper payments.

SBA operates several subsidies for small businesses, including "section 7(a)" loan guarantees--named after the statutory provision that created the program. SBA itself does not lend the money, but instead "backs" loans that the lender provides to afford the borrower better terms. If the borrower defaults, the taxpayer is on the hook up to the percentage guaranteed by SBA, with its Office of Credit Risk Management administering the program with guidance from the Treasury Department regarding third-party lenders.

In response to the pandemic, Congress modified the section 7(a) framework to create the Paycheck Protection Program. Under PPP, the Federal government guaranteed 100% of the loan, set at a low interest rate (one percent), and the loan could be forgiven if the borrower spent a certain percentage (about two-thirds) on payroll. Further, Congress expanded eligibility to include virtually any business or nonprofit with fewer than 500 employees. The maximum PPP loan amount is a function of the borrower's payroll costs during the prior year, so it varies for each loan, although no loan could exceed $10,000,000.

SBA administered PPP in two phases. The program initially ended Aug. 8, 2020, after SBA exhausted $521,000,000,000 in loan authorizations (about 85% of which were made during the program's first two months, approximately April 3, 2020 to June 4,2020). A few months later, Congress authorized additional loans. SBA relaunched the program Jan. 11, and small businesses could apply for a PPP loan through March 31. On Aug. 10, 2020, SBA began accepting loan forgiveness applications.

All told, Congress authorized SBA to guarantee $813,700,000,000 worth of loans. As of April 4, SBA had backed about 9,100,000 PPP loans from 5,460 lenders, totaling about $746,000,000,000. To put these numbers...