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PROPOSAL:

Report and Recommendations on the Air Quality Assistance Fund

SYNOPSIS:

The Air Quality Assistance Fund was established to increase the availability of financial assistance to small businesses for the purpose of complying with AQMD regulations. This report reviews the current status of the program and evaluates alternatives for enhancement of the program.

COMMITTEE:

Stationary Source, October 24, 1997 and March 20, 1998; Administrative, November 21, 1997 and March 20, 1998; Recommended for Approval

RECOMMENDED ACTIONS:

1. Authorize staff to seek alternatives to current management of loan guaranty portfolio including its purchase and/or management by a third party.

2. Authorize staff to revise the Standard Operating Procedure for the AQAF to encompass all of the following:

   • Reduce the minimum amount of the guaranty from $15,000 to $5,000.

   • Make leased equipment eligible for AQAF financing.

   • Clarify that non-permitted equipment and processes are eligible for financing.

3. Recognize the current practice of using a portion of AQAF-generated interest to provide financial packaging and referrals at no cost to small businesses.

4. Direct staff to report back to the Board within six months on the results of these changes with a recommendation for provision of financial assistance after January 1, 1999.

Barry R. Wallerstein, D.Env.
Acting Executive Officer

Introduction

In 1989, the State Legislature directed the AQMD to develop and administer financial and technical assistance to small businesses that are subject to AQMD requirements. Health and Safety Code Sections 40448.6 and 40448.7 specifically required the AQMD to establish a fund and allocate $1 million per year for four years to increase the availability of financial assistance to small businesses. Funding came from AQMD-imposed fines and penalties. AQMD implemented the Air Quality Assistance Fund (AQAF) as a revolving fund, with the expenses of the program paid from the interest generated by the funds on deposit. Until 1996, AQMD was required to maintain funding at $4 million. The legislation provides January 1, 1999 as the sunset date for the fund. At its discretion, the Governing Board can continue the AQAF without legislation.

In 1996, SB 836 allowed the use of the AQAF monies for the support of voluntary ridesharing programs through the Regional Transportation Agencies Coalition (RTAC). SB 836 also removed the requirement for AQMD to maintain the fund at a minimum level of $4 million. These amendments did not affect the general requirement for the AQMD to provide financial assistance to small businesses.

Current Status

Three million dollars has been transferred from the AQAF to the RTAC for voluntary rideshare programs. Assuming interest earnings of approximately $100,000 per year and loan repayments on schedule, a balance of approximately $1.2 million is available for use between January 1, 1998 and January 1, 1999. Additionally, this current AQAF loan portfolio consists of approximately $1.8 million in loans backed by approximately $754,000 in guaranty funds. This Board letter contains a recommendation that staff be authorized to seek to restructure and leverage the AQAF fund to increase the amount of money available. It also contains a description of potential enhancements to the AQAF’s implementation with the goal of increasing small business usage of these funds.

Staff proposes to return to the Governing Board within six months on the results of enhancements suggested in this report with recommendations for provision of financial assistance after January 1, 1999.

Legislative Objectives and Implementation

Background

The Legislature identified four major purposes for the financial assistance fund at its outset. These were: (1) to increase small business access to affordable financing, (2) to ease small business compliance, (3) to minimize economic dislocation, and (4) to increase awareness of the financial community to small business needs.

Implementation History

• AQMD created the AQAF loan guaranty program in 1989. The AQAF provides a dollar-for-dollar reserve from which the AQMD can provide guaranty of up to 90% of eligible loans in amounts from $15,000 - $250,000. These loans are provided by participating banks and used for the acquisition of air pollution control equipment and other measures to achieve compliance with the AQMD’s rules.

• The AQMD entered into an agreement with the State Trade and Commerce Agency to have the state serve as a direct lender to customers needing loans of $10,000 to $250,000 with the AQAF guaranty.

• A financial consultant was hired to receive referrals of small businesses needing assistance locating banks and preparing loan applications. The consultant reviewed loan guaranty requests from lenders, provided financial guidance and referrals, and helped market the AQAF.

• As loans are repaid, the underlying guaranty is available for use to generate new loans. The revolving fund was selected to assure that funds would be available without new appropriation. The interest generated by the fund was designated as the source to pay for the operating expenses of the fund (i.e., consultants, replenishment of fund from defaults). Costs have never exceeded available revenue.

Performance of the Fund

Between 1992 and 1997, approximately 30 businesses have used the AQAF loan guaranty. These businesses financed nearly $1.8 million in equipment and/or process changes. A listing of outstanding loan guaranties is included as Attachment 1.

The AQMD loan guaranty program has accomplished several objectives: 1) helped educate financial institutions on the benefits of lending to small companies for environmental compliance; 2) assisted businesses which would have been denied credit by banks; 3) provided longer terms for repayments; 4) provided a lower bank interest rate than normally required for small loans.

Examples of companies aided by AQMD loan guaranties are:

1. A textile dyeing company was able to open its doors and hire 140 workers in March of 1994 due to an AQAF guaranty. It has added 15 workers to its work force since that time.

2. During the first four years of the fund’s operation, 24 family-owned and -operated dry cleaning establishments were able to comply with AQMD emission standards for perchloroethylene, increase their production capabilities, and decrease their hazardous waste by taking advantage of the AQAF. [ In the case of one dry cleaner, for example, the AQMD loan guaranty induced the lender to extend 7-year credit to the business, reducing the company’s monthly debt service enough so that it could afford to purchase a new machine and achieve compliance. While the monthly payment was $883, a net expenditure of only $323 per month was required. The reason for this was a monthly reduction of perchloroethylene usage of 70 gallons. This added to the reduced cost of waste hauling and a monthly savings of $560. Compliance then became a profitable investment for the company, with the assistance of the AQAF. Without this help, the leasing company debt service of $1,085 per month would have precluded this expenditure.]

Fund Balance

The fund balance was approximately $1.9 million on February 1, 1998 after transfer of $3.0 million to RTAC ($1.5 million in 1997 and $1.5 million in 1998). This report recommends that staff be authorized to seek restructuring of the AQAF to better leverage all fund dollars. This report also recommends a series of steps for removing restrictions on the use of this fund.

Discussion of Alternatives for AQAF

AQAF guaranties range from 25% to 90% of the loaned amount. Most loans are seasoned and the portfolio has performed well with losses below the 3% projected. Staff has been approached by the Community Reinvestment Fund (CRF) and others interested in purchasing or otherwise managing the AQAF loan portfolio. Several alternatives have been discussed, including one which would pay off the banks and release AQAF funds for re-use. Staff would like to pursue formal proposals from these entities, evaluate them, and return to the Board with a recommendation. There are also a number of changes that staff believes would make the AQAF more flexible to better serve customers. These changes are discussed below. None of these changes require legislation; all require Governing Board approval because staff would need to amend the AQAF Standard Operating Procedures adopted by the Governing Board on August, 1992. As part of implementation, staff will review and consider the financial proposal received from the Small Business Coalition.

Short-Term Options: No Legislation Required

1. Authorize staff to seek alternatives to the current form, and/or contract the guaranty function to an experienced lender, and/or sell all or part of the portfolio to a third party.

a. Current Practice: AQMD staff rely on a contractor, a loan review committee, banks, and staff to administer the AQAF.

Alternative: Use the AQAF to pay one to two points to the loan packaging entity for each approvable loan guaranty transaction which finances pollution control equipment.

Issue: Conventional lenders, leasing companies and/or publicly-sponsored lenders such as the regional and local Small Business Administration Certified Development Corporations could be utilized. The cost of each

transaction would be higher.

b. Current Practice: AQAF is currently divided into two parts: on the private side, AQMD staff rely on banks to provide the loan and AQAF provides a loan guaranty to customers. On the public side, staff rely on the California Pollution Control Financing Authority and the California Department of Trade and Commerce Agency to provide direct loans to businesses, and the AQAF provides guaranty of the pool of loans.

Alternative: Sell all or part of the loan portfolio to a single third party for management and administration. Lenders such as the Community Reinvestment Fund have expressed interest in purchasing or otherwise restructuring the AQAF portfolio.

Issue: The District will have to rely on outside expertise to evaluate proposals under option 1 a and b. The actual cost is to be determined, but is estimated at between $25,000-$30,000.

Recommended action: Authorize staff to seek alternatives to current management of loan guaranty portfolio including its purchase and/or management by a third party.

2. Redefine eligibility standards for using the AQAF to make the program accessible to more companies. (This option would make the AQMD financing program available to a wider range of companies.) The following changes to current practices could be made to the program:

a. Current Practice: Companies can use the AQAF to obtain loan guaranties ranging from $15,000 to $250,000.

Alternative: Reduce the minimum guaranty from $15,000 to $5,000.

Issue: Increases risk of default.

b. Current Practice: AQAF guaranty is not available for leased equipment.

Alternative: Change AQAF Standard Operating Procedure to allow leases to be eligible for guaranties.

Issue: Could apply to many types of equipment including ventless degreasers, boilers, clean-fueled vehicles and printing machines.

c. Current Practice: AQMD receives extensive credit documentation which is not usually required by leasing companies.

Alternative: Require less credit documentation in the form of tax returns or financial statements.

Issue: This strategy worked well in single family home loans and is generally referred to as a ‘low doc’ transaction. This approach has been recently instituted by the U.S. Small Business Administration. However, this could result in increased default rates.

d. Current Practice: The AQAF is used to provide loan guaranties for equipment requiring a permit from the AQMD. New regulations on area source emissions may require the purchase of new aqueous systems that do not need AQMD permits. This equipment, although it reduces air pollution, is not eligible for AQAF financing.

Alternative: Allow equipment and process changes which result in lower air emissions to receive AQAF financing.

Issue: The AQMD loses the ability to use the permit to encourage repayment.

Recommended action: Authorize staff to revise the Standard Operating Procedure for the AQAF to encompass all of the following:

• Reduce the minimum amount of the guaranty from $15,000 to $5,000.

• Make leased equipment eligible for AQAF financing.

• Clarify that non-permitted equipment and processes are eligible for financing.

3. Allocate funds from the AQAF to focus on no-cost financial packaging and referrals for small businesses.

Current Practice: Staff has used the AQAF consultant to offer this service on a limited basis. Businesses are helped to use funding programs in addition to AQAF when they can be appropriately identified.

Alternative: Establish and market financial assistance to small businesses which includes loan packaging and referral. Issue an RFP to identify a list of available consultants and a maximum rate.

Issue: This option would reduce the AQAF account by the amount of the contract since these costs would not be recovered.

Recommended action: Recognize the current practice of using a portion of AQAF-generated interest to provide financial packaging and referrals at no cost to small businesses.

Resource Impacts

The AQAF was set up so that the expenses of the program are paid from interest earned on the AQAF fund. The recommendations contained herein would not impact the AQMD general fund. An undetermined increase in defaults could occur as a result of recommendations two and three.

Attachments

1 - Air Quality Assistance Fund Loan Guaranties

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