Small Business Size Standards: Inflation Adjustment

Tag : Marine Hardware

The December 6, 2005 interim final rule increased SBA's mostcommon size standard for the retail trade and services industries(referred to as the "nonmanufacturer anchor size standard") from$6.0 million in average annual receipts to $6.5 million. This rulefurther increases the nonmanufacturer anchor size standard to $7.0million. This rule also increases other monetary-based sizestandards proportionately. For example, the interim final ruleincreased the size standard for Computer Systems Design Services(NAICS 541512) from $21 million to $23 million. This rule increasesthat industry's size standard to $25.0 million.
The revisions adopted by this final rule demonstrate that SBAmust stay abreast of changes in the economy to ensure that sizestandards are established at appropriate levels. To meet thatobjective, SBA is conducting a comprehensive review of all of itssmall business size standards over a 2-year period. This reviewwill consist of a series of proposed rules beginning in 2008examining industries within a specific NAICS Industry Sector. SBAexpects that, as a result of this comprehensive review, it willpropose in the future additional revisions to certain sizestandards based on its evaluation of industry data.
How SBA Adjusts Small Business Size Standards for Inflation
For purposes of this final rule, SBA uses the same methodologyas used in the 2005 interim final rule, but applies the mostcurrent inflation statistics available. The methodology isdescribed below:
1. Select a measure of inflation. SBA uses the chain-type priceindex for the Gross Domestic Product (GDP), a broad measure ofinflation for the economy as a whole. The U.S. Department ofCommerce, Bureau of Economic Analysis (BEA), publishes this indexquarterly in its National Income and Product Accounts publications(Table 1.1.4, Line 1).
2. Select base period. For this rule, SBA selects the thirdquarter of 2001 as the base period--the end period used for theFebruary 2002 adjustment. Since this is a final rule to the interimfinal rule, it is more accurate to use the same starting period asfor the December 2005 adjustment than the end period of the interimfinal rule in order to make correct rounding adjustments. Thechain-type price index for the GDP for the third quarter of 2001was 102.690.
3. Select end period. SBA selects the first quarter of 2008 asthe end period for this inflation adjustment because it is thelatest available quarterly data that BEA has published. The chaintype price index for GDP then stood at 121.363.
4. Calculate the total rate of inflation. Based on the priceindexes, inflation increased 18.2 percent from the base to the endper iods (121.363 / 102.690) - 1.00) x 100 percent = 18.2 percent).
5. Apply the adjustment to the monetary-based size standards.Multiply the size standards in effect prior to the interim finalrule by 1.182, and round to the closest $0.5 million.
Special Situations Regarding Inflation Adjustment
1. Small Business Investment Company (SBIC) Program: Certainmonetary-based size standards are not changed in this rule.Specifically, the size standards for agricultural industries andfor "smaller enterprises" under the SBIC Program are set by statuteand, therefore, cannot be changed through rulemaking. As with the2005 interim final rule, SBA has elected not to change the SBICProgram's small business alternate net worth and net income sizestandards. SBA increased the alternate net worth and net incomesize standards for the SBIC Program in 1994 threefold. Althoughinflation has increased since that time, SBA continues to believethat the SBIC size standard levels are sufficient to accomplish itsprogram objectives. SBA received no comments on these sizestandards. Therefore, SBA is allowing the existing size standardsto remain in place for the SBIC Program because no further increaseis necessary at this time.
2. Size Standards Adjusted Between 2002-2005: As stated in the2005 interim final rule, the Agency has changed a number ofmonetary-based size standards since the February 2002 inflationadjustment as a result of an in-depth review of industrycharacteristics. SBA is applying the full inflation adjustmentpercent to those monetary-based size standards as well. When SBAestablishes or revises a size standard, it does so in relation toother existing size standards to ensure that industries withsimilar characteristics have similar size standards. To provide asmaller inflation adjustment due to the shorter time period for thecalculation, while technically precise, would be inconsistent withthe size standards decision-making process, and would in essencenullify part of the industry specific adjustments made between2002-2005 period.
3. Size Standards Adjusted After 2005: Since the time of theinterim final rule SBA revised the size standard for the SecurityGuards and Patrol Services industry (NAICS 561612) from $11.5million in average annual receipts to $17 million. This revisionwas based on an in-depth review of the economic characteristics ofbusinesses in that industry (71 FR 37490, June 30, 2006). SBA hadproposed $15.5 million (70 FR 68368, November 10, 2005), butadjusted the proposed size standard in the June 30, 2006, finalrule to account for the December 6, 2005, inflation adjustment. Aswith that final rule, this inflation final rule will adjust theSecurity Guards and Patrol Services industry size standard toaccount for the additional inflation. Applying 18.2 percentinflation to the $15.5 million size standard proposed in 2005results in a new size standard of $18.5 million ($15,500,000 x1.182 = $18,321,000, rounded to the nearest $500,000 increment, or$18,500,000).
4. Program-Based Size Standards: Most SBA programs apply sizestandards established for industries defined by the North AmericanIndustry Classification System (NAICS). SBA has also establishedsize standards on a program basis rather than an industry basis.These size standards are adjusted in the same manner as theindustry-based size standards (except for the SBIC Program asdiscussed above). Table 1 lists the program-based size standardsand the changes adopted by this rule.