Re-design Air Quality Assistance Fund Program to Provide Financial Assistance for Small Businesses that are Subject to Air Pollution Control Requirements
SYNOPSIS:
The Air Quality Assistance Fund was established as a loan guarantee program to increase the availability of financial assistance to small businesses for the purpose of complying with AQMD regulations. This report reviews past and current performance of the program and recommends enhancements to make the program more effective in the present financial market.
COMMITTEE:
Administrative, May 12, 2000; Reviewed
RECOMMENDED ACTION:
Authorize staff to use up to $1 million dollars in AQAF funds to guarantee lease-purchase agreements for small businesses who need such credit enhancement to finance equipment or processes to reduce air pollution and comply with AQMD regulations.
Authorize staff to prepare an agreement, for Board approval, with the California Pollution Control Financing Authority (CPCFA) of the State Treasurer’s Office, to utilize the California Capital Access Program (CalCAP) to provide leverage for AQAF dollars and make bank financing available to small businesses for air pollution reduction and compliance.
Authorize staff to earmark $750,000 of AQAF funds currently held by CPCFA for the CalCAP and transfer $100,000 of those funds to CalCAP as soon as possible.
Authorize staff to retain consultant services to market the AQAF and provide one-on-one financing assistance to small businesses at a cost not to exceed $50,000 for FY 2000-01.
Authorize staff to redirect $200,000, on a one-time basis, from the Air Quality Assistance Fund (AQAF) to provide grant application assistance to public and private entities for the purpose of complying with the 1190 series of rules, upon adoption by the Governing Board of those rules. Contracts for this purpose will be brought to the Governing Board prior to issuance.
Authorize staff to continue to use AQAF-generated interest to pay the expenses of administering the
AQAF.
Authorize staff to revise the Standard Operating Procedures (SOP) for the AQAF to reflect these changes.
Barry R. Wallerstein, D.Env.
Executive Officer
Background
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 to allocate $1 million per year from penalties for four years to create the AQAF. AQMD implemented the AQAF as a revolving fund, with the expenses of the program paid from the interest generated by the funds on deposit. This legislation had a sunset date of January 1, 1999. However, the AQMD is still committed to provide financial assistance to small businesses. The Governing Board then directed staff to redesign the AQAF to make it more effective in getting funding to small business.
The Legislature identified four major purposes for the financial assistance. These were to: (1) increase small business access to affordable financing; (2) ease small business compliance; (3) minimize economic dislocation; and (4) increase awareness in the financial community of small business needs.
Implementation History
AQMD created the AQAF Loan Guarantee Program in 1991. The AQAF provides a dollar-for-dollar reserve from which the AQMD can provide guarantees of up to 90% of eligible loans in amounts from $15,000 - $250,000. These loans are provided by participating banks and are 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 and the CPCFA to sponsor the CLEAN Program. The AQAF deposited $750,000 with the trustee for the CLEAN program, which CPCFA used to make $3 million available to businesses throughout the state. The State serves as a direct lender to customers needing loans of $10,000 to $250,000 with the AQAF guarantee.
A financial consultant was retained to receive referrals of small businesses needing assistance with locating banks and preparing loan applications. The consultant reviewed loan guarantee requests from lenders, provided financial guidance and referrals, and helped market the
AQAF.
Senate Bill 836 redirected $3 million 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.
The Governing Board authorized staff to reduce the minimum loan guarantee from $15,000 to $5,000 and to make leases eligible for the AQAF while the program is being redesigned.
Performance of the Fund
Between 1992 and 1999, the AQAF issued a total of 32 loan guarantees to businesses. These businesses financed over $1.8 million in equipment and/or process changes. To date, only one loan guaranteed by the program has ended in default. The default of this dry cleaning business resulted in a $15,467 fund loss.
The AQAF Loan Guarantee 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; and (4) provided a lower bank interest rate than normally required for small business loans.
Examples of companies aided by AQMD loan guarantees are listed below.
A textile dyeing company was able to stay in business and retain 140 workers in March of 1994 due to an AQAF guarantee.
During the first four years of the fund’s operation, 24 family-owned dry cleaning establishments were able to comply with AQMD emission standards for perchloroethylene, to increase their production capabilities, and to decrease their hazardous waste by taking advantage of the
AQAF.
In the case of one dry cleaner, the AQAF loan guarantee induced the lender to extend seven-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, the company was able to reduce its PERC usage and hazardous waste fees, saving $560 per month. This made the net expenditure only $323 per month.
Current Status
Total assets of the AQAF fund, at present, are approximately $2.2 million. As of December 31, 1999, the AQAF had a total of 16 loans outstanding with a total unpaid balance of approximately $137,000. As loans are repaid, the underlying funds are available for use to generate new loan guarantees. The revolving fund was selected to assure that funds would be available without new appropriation. The operating expenses of the fund are paid from interest generated by the fund. Costs have never exceeded available revenue. These funds include cash-on-hand, interest, and uncommitted funds with CPCFA’s trustee (for the CLEAN program).
At its April 10, 1998 meeting, the Governing Board authorized staff to investigate the redesign of the AQAF to make it more accessible to businesses. Applied Development Economics was hired through a competitive bid process to assist with this effort. As a result of the consultant’s recommendations, staff conversations with small businesses, and input from the Stationary Source Committee, staff proposes items one, two and three. As a result of a need identified through workshops with school districts, cities, and other public entities, staff is proposing item four.
Proposal
In order to meet new and revised AQMD rules, small businesses continue to need financial assistance. About half of the businesses that were surveyed indicated they prefer to use bank loans, while the other half prefer to use leasing companies to obtain needed equipment. Therefore, staff proposes to take the existing AQAF which has a public banking component (CLEAN) and a private banking component (AQMD-administered AQAF) and turn it into a program which has a public/private banking component (CalCAP) and a lease guarantee component.
Bank Loan Component of Revised AQAF
For the bank loan component, the AQMD proposes to make use of the existing program of the CPCFA called CalCAP. The revised AQAF would redirect the $750,000 currently allocated to the CLEAN loan program (also administered by CPCFA) to the CalCAP, with $100,000 transferred as soon as possible after Governing Board approval. The remaining funds would be earmarked for transfer to the CalCAP as needed.
The CalCAP Program was created by the Legislature in 1994, and has made more than 2,400 small-business loans since it began. It provides loan portfolio insurance, rather than guaranteeing individual loans. Under CalCAP, a "loss reserve account" is created for each participating bank -- typically 8% of the total CalCAP loans made by that bank. For each CalCAP loan, the borrower typically pays a 2% fee, the bank pays 2% and the state CPCFA pays 4%.
Under the redesigned AQAF, the District's funds would be used to pay the borrower's fees. Used this way, assuming a borrower's fee of 2%, the District could make up to $5 million in loans available for every $100,000 it places on deposit. The CPCFA has indicated an interest in working with the District to develop this program. Funds used to pay borrower fees would not revolve back to the AQAF. However, staff estimates that up to $35 million could be made available to businesses within the AQMD’s jurisdiction under this program. The CPCFA and the California Integrated Waste Management Board have developed a similar arrangement.
Lease Guarantee Component of Revised AQAF
The intent is to retain the simple, quick application process and to help increase access to leases for businesses that might otherwise have difficulty qualifying for financing. The recommendation is to guarantee repayment of a percentage of the outstanding lease amount during the early period of the lease. The amount of the guarantee could range up to 90% for up to three years. Leases typically last three to five years, with most defaults occurring during the first 24 months.
Approximately $1 million of the AQAF would be used to guarantee leases. The loss rate from the leasing program is expected to be between 2% and 6%. As leases are repaid, the AQAF guarantee would become available for additional guarantees.
AQAF Small Business Financial Consultant
The AQAF Financial Consultant would have five main responsibilities: program development; program marketing; loan packaging; program monitoring; and reporting on fund performance. Program development would include assisting with the revision of the AQAF standard operating procedures and helping draft the agreements and documents necessary to participate in CalCAP and establish the lease guarantee program. Program development would also include preparing procedures for how the AQMD will review and authorize lease guarantees and CalCAP participation.
Marketing efforts would include: development of the marketing strategy; preparation and distribution of marketing materials; and publicizing the revised AQAF to banks, leasing agents, business groups, and equipment vendors.
The consultant would also provide one-on-one financing assistance to small businesses referred by the AQMD or by other sources. This assistance would include: providing them with an overview of various financial assistance programs; helping them choose the best option; linking them with the appropriate agency, bank or leasing company; and assisting them with preparing the necessary loan or lease applications.
The financial consultant would monitor the AQAF and all the loans and leases funded by the program. For the leasing program, in particular, the consultant would develop an early warning system for flagging potential defaults and would work with the leasing agents and businesses to maintain the leases in good standing.
The financial consultant would report periodically on the performance of the AQAF. Reports would include: information on such activities as the number and type of marketing efforts performed; the number and type of businesses assisted; the number and value of CalCAP loans made; the number and value of leases guaranteed; and the number and value of AQMD permits that were issued as a result of the
AQAF.
The cost of retaining an AQAF Small Business Financial Consultant would be approximately $50,000 for the first year, when marketing efforts are expected to be the most intense. These costs would be paid out of the interest earned on the AQAF reserve funds.
Financial Assistance – Local Government and Public/Private Entity Component
In recent workshops on the proposed 1190 series of rules, the District has become aware that many school districts and other public entities will need assistance applying for Carl Moyer and other grants to finance compliance with proposed rules. Staff proposes redirecting up to $200,000 from the AQAF principal to provide grant application assistance to help local governments and public or private entities comply with 1190 rules. Services could also be provided to parties not covered by the 1190 rules who are applying for air pollution control grants.
Process
Upon approval of these recommended enhancements to the AQAF, staff will issue an RFP for a consultant to draft the lease agreements, finalize the MOU between the CPCFA and the AQMD, revise the SOP, and commence marketing. These documents will be provided to the Governing Board prior to execution. Contracts to implement the Financial Assistance to Local Governments and public entities will be returned to the Governing Board for approval.
Resource Impacts
The recommendations contained herein would not impact the AQMD general fund or staff resources. The AQAF was set up so that the expenses of the program are paid from the interest earned on the AQAF fund and loan guarantees are covered by the principal balance. When implemented, these recommendations will decrease the capital in the AQAF by the amount of money paid to banks in CalCAP to offset borrower fees. The maximum reduction for this purpose is $100,000 the first year. Losses in the lease guarantee would also reduce the capital in the AQAF. Funds redirected to provide assistance to local government and public entities would reduce the fund by $200,000.
