The SSBCI provided funding, allocated by formula and distributed in oneState Small Business Credit Initiative: March 1, 2021 Implementation and Funding Issues Robert Jay Dilger Congressional interest in small business access to capital has always been high, primarily Senior Specialist in because small businesses are viewed as a means to stimulate economic activity and create jobs, American National but it has become especially acute in the wake of the Coronavirus Disease 2019 (COVID-19) Government pandemic’s widespread adverse economic impact on the national economy. Grant A. Driessen In recognition of small business’s current economic difficulties, Congress is currently Specialist in Public Finance considering budget reconciliation legislation (H.R. 1319, the American Rescue Plan Act of 2021) that includes an appropriation of $10 billion for another round of funding for the State Small Business Credit Initiative (SSBCI). The SSBCI was originally authorized by P.L. 111-240, the Small Business Jobs Act of 2010, as a means to assist small businesses following the Great Recession (2007-2009). The $1.5 billion program was administered by the Secretary of the Treasury from 2010 through September 27, 2017. The original SSBCI provided funding, allocated by formula and distributed in one -third increments, to states, territories, and eligible municipalities (hereinafter referred to as states) to expand existing or create new state small business investment programs, including state capital access programs, collateral support programs, loan participation programs, loan guarantee programs, and venture capital programs. In most instances, the initial round of funding (called a tranche) took place in FY2011. Most states received their second tranche during FY2013. As of December 31, 2016 (the latest available data), 98% of total allocated funding had been disbursed to the states and all 57 participants had received their first tranche, 56 had received at least two tranches, and 53 had received their third and final tranche.

SSBCI participants were expected to leverage their SSBCI funds to generate new small business lending that is at least 10 times the amount of their SSBCI funds. As of December 31, 2016, SSBCI participants had leveraged $8.95 in new financing for every $1 in SSBCI funds. Forty-seven states; American Samoa; the District of Columbia; Guam; the Northern Mariana Islands; Puerto Rico; the U.S. Virgin Islands; Anchorage, Alaska; two consortiums of municipalities in North Dakota; and a consortium of municipalities in Wyoming participateparticipated in the program.

The Obama Administration recommended in its FY2015, FY2016, and FY2017 budget requests that another $1.5 billion round of funding take place, with $1 billion competitively awarded to states and $500 million awarded "“by a need -based formula based on economic factors such as job losses and pace of economic recovery."” Legislation with provisions similar to the Obama Administration'’s proposal was introduced during the 113^th113th Congress (H.R. 4556 and S. 2285), the 114^th), the 114th Congress ((S. 1901, , H.R. 5144, , and H.R. 5672), and the 115^th), the 115th Congress (S. 1897).

), and the 116th Congress (S. 3551). This report examines the SSBCI and its implementation, including Treasury'’s response to initial program audits conducted by the U.S. Government Accountability Office (GAO) and Treasury'’s Office of Inspector General (OIG). These initial audits suggest that SSBCI participants generally met the statute'’s requirements, but that there were some compliance problems. They also indicate that Treasury'’s program oversight could have been improved and that performance measures are neededwere n eeded to assess the program'’s efficacy. Congressional Research Service link to page 5 link to page 7 link to page 9 link to page 9 link to page 10 link to page 11 link to page 11 link to page 12 link to page 12 link to page 12 link to page 13 link to page 14 link to page 17 link to page 18 link to page 21 link to page 21 link to page 22 link to page 22 link to page 23 link to page 24 link to page 25 link to page 25 link to page 26 link to page 27 link to page 27 link to page 28 link to page 29 link to page 30 link to page 31 link to page 32 link to page 33 link to page 33 link to page 34 link to page 35 link to page 37 link to page 38 link to page 39 link to page 40 link to page 40 link to page 41 link to page 42 link to page 15 State Small Business Credit Initiative: Implementation and Funding Issues Contents Overview ....................................................................................................................... 1 Legislative Origins .......................................................................................................... 3 SSBCI Programs ............................................................................................................. 5 State Capital Access Programs ..................................................................................... 5 State Loan Participation Programs................................................................................ 6 State Loan Guarantee Programs ................................................................................... 7 State Collateral Support Programs ................................................................................ 7 State Venture Capital Programs.................................................................................... 8 SSBCI Funding............................................................................................................... 8 Application Process ................................................................................................... 8 The Funding Formula................................................................................................. 9 State-by-State Al otments ......................................................................................... 10 Audits, Evaluation Reports, and Program Adjustments ....................................................... 13 GAO’s Audits ......................................................................................................... 14 Treasury’s Inspector General Evaluation Reports.......................................................... 17 Treasury’s Inspector General Use of SSBCI Funds Audit Reports ................................... 17 California.......................................................................................................... 18 Montana ........................................................................................................... 18 Vermont ............................................................................................................ 19 Michigan .......................................................................................................... 20 Texas................................................................................................................ 21 Massachusetts .................................................................................................... 21 Delaware .......................................................................................................... 22 New Jersey........................................................................................................ 23 Alabama ........................................................................................................... 23 Missouri ........................................................................................................... 24 Washington ....................................................................................................... 25 Kansas.............................................................................................................. 26 Florida.............................................................................................................. 27 West Virginia ..................................................................................................... 28 Il inois .............................................................................................................. 29 South Carolina ................................................................................................... 29 American Samoa ................................................................................................ 30 North Carolina ................................................................................................... 31 Idaho ................................................................................................................ 33 Indiana ............................................................................................................. 34 Tennessee.......................................................................................................... 35 North Dakota Mandan Consortium........................................................................ 36 Rhode Island (Slater Technology Fund) ................................................................. 36 New York (Canrock Innovate NY Fund, LP)........................................................... 37 Concluding Observations ............................................................................................... 38 Tables Table 1. SSBCI Programs ............................................................................................... 11 Congressional Research Service link to page 43 link to page 46 State Small Business Credit Initiative: Implementation and Funding Issues Appendixes Appendix. The Original SSBCI’s Legislative Origins ......................................................... 39 Contacts Author Information ....................................................................................................... 42 Congressional Research Service State Small Business Credit Initiative: Implementation and Funding Issues Overview Congressional interest in smal business access to capital has always been high, primarily because smal businesses are viewed as a means to stimulate economic activity and create jobs, but it has become especial y acute in the wake of the Coronavirus Disease 2019 (COVID-19) pandemic’s widespread adverse economic impact on the national economy. In recognition of smal business’s current economic difficulties, Congress is currently considering budget reconciliation legislation (H.R. 1319, the American Rescue Plan Act of 2021) that includes an appropriation of $10 bil ion for another round of funding for the State Smal s efficacy.

During the 111^th Congress, P.L. 111-240, the Small Business Jobs Act of 2010, provided the Small Business Administration (SBA) additional funding, authorized several SBA pilot programs, and enhanced several of the SBA's lending programs in an effort to assist small businesses access capital.³ The act also authorized the Secretary of the Treasury to establish and administer a $30 billion Small Business Lending Fund (SBLF), in which $4.0 billion was issued to encourage community banks with less than $10 billion in assets to increase their lending to small businesses, and a $1.5 billion State Small Business Credit Initiative (SSBCI). The SSBCI was original y authorized by P.L. 111-240, the Smal Business Jobs Act of 2010, as a means to assist smal businesses following the Great Recession (2007-2009). The $1.5 bil ion program was administered by the Secretary of the Treasury from 2010 through September 27, 2017.1 The original SSBCI provided funding, al ocatedInitiative (SSBCI).⁴ The act limited Treasury's role in administrating the SSBCI program to seven years from enactment (September 27, 2010). As a result, Treasury role in administering the program sunset on September 27, 2017.

The SSBCI provided funding, allocated through a statutorily created formula and distributed in one-third increments (calledcal ed tranches), to states, the District of Columbia, eligible territories, and eligible municipalities municipalities (hereinafter states) to expand existing or create new state small smal business investment programs, including capital access programs, collateral support programs, loan participation programs, loan guarantee programs, and venture capital programs. In most instances, states received their initial tranche in FY2011, with more than $366 million in mil ion in SSBCI funds transferred to states.⁵2 At that time, Treasury anticipated providing another $859 million mil ion in SSBCI funds to states in FY2012.⁶3 However, because it took states longer than anticipated to expend, transfer, or obligate their first tranche of SSBCI funds, Treasury transferred less SSBCI funding to states in FY2012 than in FY2011 ($187 millionmil ion, for a total of $553 million).⁷ mil ion).4 Treasury transferred $364 millionmil ion in SSBCI funds to states (totaling $917 millionmil ion) in FY2013, $229 million mil ion in FY2014 (totaling $1.146 billionbil ion), $216 million mil ion in FY2015 (totaling $1.362 billionbil ion), and $50 million mil ion in FY2016 (totaling $1.412 billion).⁸

As of December 31, 2016bil ion).5 As of December 31, 2016 (the latest available data), Treasury had disbursed $1.43 billionbil ion, or about 98%, of the $1.45 billionbil ion available to states ($1.5 billionbil ion minus Treasury'’s administrative costs).⁹ As of December 31, 2016, all 1 P.L. 111-240, the Small Business Jobs Act of 2010, limited T reasury’s role in administrating the State Small Business Credit Initiative (SSBCI) program to seven years from enactment (September 27, 2010). As a result, T reasury role in administering the program sunset on September 27, 2017. 2 U.S. Office of Management and Budget (OMB), Appendix, Budget of the U.S. Government, FY2013: Department of the Treasury, p. 1061, at http://www.gpo.gov/fdsys/pkg/BUDGET -2013-APP/pdf/BUDGET -2013-APP.pdf. 3 OMB, Appendix, Budget of the U.S. Government, FY2013: Department of the Treasury, p. 1061. 4 OMB, Appendix, Budget of the U.S. Government, FY2014: Department of the Treasury, p. 991, at https://www.gpo.gov/fdsys/pkg/BUDGET -2014-APP/pdf/BUDGET -2014-APP.pdf. 5 U.S. Department of the T reasury, State Small Business Credit Initiative, FY 2016: President’s Budget, p. 6, at http://www.treasury.gov/about/budget-performance/CJ16/18.%20SSBCI%20FY%202016%20CJ.pdf; U.S. Department of the T reasury, State Sm all Business Credit Initiative: A Sum m ary of States’ Quarterly Reports as of Septem ber 30, 2015, p. 1, at https://www.treasury.gov/resource-center/sb-programs/DocumentsSBLFT ransactions/SSBCI%20Quarterly%20Report%20Summary%20September%202015_FINAL.pdf ; and U.S. Department of the T reasury, State Sm all Business Credit Initiative: A Sum m ary of States’ Quarterly Reports as of Septem ber 30, 2016, p. 1, at https://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI%20Quarterly%20Report%20Summary%20September%202016_Final.pdf . Congressional Research Service 1 State Small Business Credit Initiative: Implementation and Funding Issues costs).6 As of December 31, 2016, al 57 participants had received their first tranche, 56 had 57 participants had received their first tranche, 56 had received their second tranche, and 53 had received their third tranche.¹⁰

7 States were expected to leverage their SSBCI funds to generate new small smal business lending that is at least 10 times the amount of their SSBCI funds (a leverage ratio of 10:1). As of December 31, 2016, SSBCI participants had leveraged $8.95 in new financing for every $1 in SSBCI funds.¹¹ 8 There arewere 57 participants: 47 states; American Samoa; the District of Columbia; Guam; the Northern Mariana Islands; Puerto Rico; the U.S. Virgin Islands; Anchorage, Alaska; two consortiums of municipalities in North Dakota; and a consortium of municipalities in Wyoming.

During congressional consideration, advocates argued that the SBLF and SSBCI willSSBCI would promote economic growth and job creation by enhancing small smal business access to capital. Opponents argued that the SBLF and SSBCI did not address the need to stimulate demand for credit by small smal businesses, which, in the opponents' opponents’ view, iswas the core issue affecting the role of small smal business in job creation. They argued that "“the solutions to America'’s economic problems do not lie in more taxpayer-funded bailouts"bailouts” and advocated small smal business tax reductions as a more effective means to stimulate job creation and economic growth.¹²9 For additional discussion of these different approaches to stimulate job creation and economic growth, see CRS Report R40985, Small Business: Access to Capital and Job Creation, by [author name scrubbed] and CRS Report R42045, The Small Business Lending Fund, by [author name scrubbed].

Robert Jay Dilger. It is difficult to determine the full extent of the SSBCI'’s effect on small smal business lending. As of December 31, 2016, states had spent or obligated about 88% of the $1.45 billionbil ion available ($1.27 billion bil ion of $1.45 billionbil ion), which is sufficient to provide an indication of the program'’s impact on small smal business lending.¹³10 However, determining the program'’s influence on small smal business lending is likely to be more suggestive than definitive because differentiating the SSBCI'’s effect on smal on small business lending from other factors, such as changes in the lender'’s local economy, is methodologically challenging, especiallymethodological y chal enging, especial y given the relatively small smal amount of financing involved relative to the national market for small smal business loans. The SSBCI's $1.5 billion in financing representsIn 2017, the SSBCI’s $1.5 bil ion in financing represented about 0.24% of outstanding non-agricultural small business loans.¹⁴

Treasury has reported that SSBCI funds supported more than 21,000 loans and investments in small business amounting to over $10.7 billionsmal business loans.11 6 U.S. Department of the T reasury, State Small Business Credit Initiative: A Summary of States’ Quarterly Reports as of Decem ber 31, 2016, p. 1, at https://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI_Quarterly_Report_Summary_December_2016.pdf . 7 U.S. Department of the T reasury, State Small Business Credit Initiative: A Summary of States’ Quarterly Reports as of Decem ber 31, 2016, p. 1. 8 U.S. Department of the T reasury, State Small Business Credit Initiative: A Summary of States’ 2016 Annual Reports, p. 2, at https://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI%20Summary%20of%20States%20Annual%20Report%202016_508%20Compliant .pdf. 9 U.S. Congress, House Committee on Financial Services, T o Create the Small Business Lending Fund Program to Direct the Secretary of the T reasury to make Capital Investments in Eligible Institutions in order to Increase the Availability of Credit for Small Businesses, and for other Purposes, report to accompany H.R. 5297, 111th Cong., 2nd sess., May 27, 2010, H.Rept. 111-499 (Washington: GPO, 2010), pp. 37, 38. 10 U.S. Department of the T reasury, State Small Business Credit Initiative: A Summary of States’ Quarterly Reports as of Decem ber 31, 2016, p. 1, at https://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI_Quarterly_Report_Summary_December_2016.pdf. In addition, as of December 31, 2016, 34 states reported that they had spent about $279.9 million for new State Small Business Credit Initiative (SSBCI) supported loans and investments using recycled SSBCI funds generated from SSBCI loan r epayments and returns on SSBCI investments. 11 Federal Deposit Insurance Corporation, “Statistics on Depository Institutions,” at https://www5.fdic.gov/sdi/main.asp?formname=compare. As of December 31, 2017, there was $627.8 billion in outstanding non -agricultural small business loans (defined as the sum of “total loans secured by nonfarm nonresidential properties of $1,000,000 or less” and “total commercial and industrial loans to U.S. addressees of $1,000,000 or less”). Congressional Research Service 2 link to page 43 State Small Business Credit Initiative: Implementation and Funding Issues Treasury has reported that SSBCI funds supported more than 21,000 loans and investments in smal business amounting to over $10.7 bil ion, with more than 80% of the funds and investments made to small smal businesses with 10 or fewer full-time employees. Treasury has also reported that small smal business owners indicated that the funds helped them to create or retain 240,669 jobs (79,193 new jobs and 161,476 retained jobs).¹⁵

12 The Obama Administration recommended in its FY2015, FY2016, and FY2017 budget requests that another $1.5 billion bil ion round of funding take place. Under their proposal, $1 billion bil ion would have been competitively awarded to states "“best able to target local market needs, promote inclusion, attract private capital for start-up and scale-up businesses, strengthen regional entrepreneurial ecosystems, and evaluate results,"” and $500 millionmil ion awarded "“by formula based on economic factors such as job losses and pace of economic recovery."¹⁶

”13 Legislation containing provisions similar to the Obama Administration'’s proposal was introduced during the 113^th113th Congress (H.R. 4556, the Small Smal Business Access to Capital Act of 2014, and S. 2285S. 2285, its companion bill bil in the Senate), the 114^th114th Congress (S. 1901, the Small Smal Business Access to Capital Act of 2015, H.R. 5144, the Jumpstart Housing Opportunities Utilizing Small Smal Enterprises Act of 2016, and H.R. 5672, the Small , the Smal Business Access to Capital Act of 2016), the 115th Congress (S. 1897, the Smal Business Access to Capital Act of 20162017), and the 115^th116th Congress (S. 1897, the Small S. 3551, the Smal Business Access to Capital Act of 2017).¹⁷

2020).14 This report examines the current SSBCI proposal and its legislative origins and the implementation of the original SSBCISSBCI and its implementation, including Treasury'’s response to initial program audits conducted by the U.S. Government Accountability Office (GAO) and Treasury'’s Office of Inspector General (OIG). These audits suggested that states generallygeneral y met the statute's requirements but that ’s requirements, but there were some compliance problems. They also indicated that Treasury's ’s oversight of the program could have been improved and that performance measures arewere needed to assess the program'’s efficacy.

Legislative Origins

SSBCI Programs

The SSBCI provided funding to expand existing or create new state small business investment On February 4, 2021, Senator Gary Peters, who sponsored legislation establishing the original SSBCI (see the Appendix for the original SSBCI’s legislative origins), introduced S. 258, the 12 U.S. Department of the T reasury, State Small Business Credit Initiative: A Summary of States’ 2016 Annual Reports, pp. 2, 3, 15, at https://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI%20Summary%20of%20States%20Annual%20Report%202016_508%20Compliant.pdf . 13 OMB, The Appendix, Budget of the United States Government, Fiscal Year 2017: Department of the Treasury, pp. 1034, 1035, at https://www.gpo.gov/fdsys/pkg/BUDGET -2017-APP/pdf/BUDGET -2017-APP.pdf. 14 H.R. 5144, the Jumpstart HOUSE Act of 2016, added a provision (SEC. 3. Support for affordable housing projects) designed to facilitate the financing of affordable housing projects: “ ... to develop, acquire, construct, rehabilitate, maintain, operate, or manage housing projects that provide housing that is affordable for low- or moderate-income households, as determined by the Secretary, in consultation with the Secretary of Housing and Urban D evelopment.” H.R. 5672, the Small Business Access to Capital Act of 2016, added a provision (SEC. 2. New tranches of capital for successful State programs) that would have included competitive award factors designed to provide preference to participants based on their plans to (I) leverage private sector capital; (II) create and retain jobs during the 2 -year period beginning on the date of the award; (III) serve small businesses that have been incorporated or in operation for not more than 5 years; (IV) serve low- or moderate-income communities; (V) serve minority- and women-owned small businesses; and establish or continue a robust self-evaluation of their use of awarded funds; provide non-federal funds in excess of the amount required; and the extent to which the participant expended, obligated, or transferred their 2010 allocation. Congressional Research Service 3 State Small Business Credit Initiative: Implementation and Funding Issues Smal Business Access to Capital Act of 2021.15 The bil would provide $10 bil ion for another round of SSBCI funding ($5 bil ion in formula-based al ocations and an additional $5 bil ion in competitive grants for states that have already capitalized the financing received from the 2010 program).16 Several organizations indicated their support for the bil . For example, the Council of Development Finance Agencies (CDFA) argued that A $10 billion infusion in a reauthorized SSBCI Program would provide immediate access to capital for small businesses that desperately need it. The programs created by states under the original SSBCI are still in operation and would be ready to immediately deploy capital to businesses in need. There would be no need to create new rules and regulations should this option be enacted. States are prepared to receive an infusion of SSBCI funding immediately.17 There were disagreements concerning whether a reauthorization of the SSBCI should be included in the budget reconciliation bil . General y speaking, Democrats argued that the SSBCI should be included in the reconciliation bil because the program  had a proven track record of assisting smal businesses create and retain jobs; and  required states to develop programs that targeted the needs of underserved communities, which, they argued, had not been adequately addressed by the Smal Business Administration’s Paycheck Protection Program (PPP), which provides forgivable loans to smal businesses adversely affected by COVID-19.18 Republicans general y argued that the SSBCI should not be included in the reconciliation bil because the program  was an extraneous matter that did not directly address COVID-19 and would make funding available for years after the pandemic’s expected duration;  was duplicative of the PPP, which had, at that time, $140 bil ion in lending authority stil available; and  had limited oversight, did not meet al of its statutory objectives, was slow to launch and inefficient at deploying capital, and had a questionable effect on job creation.19 15 Senator Gary Peters introduced similar legislation (S. 3551, the Small Business Access to Capital Act of 2020) during the 116th Congress. T hat bill would have appropriated $3 billion for another round of SSBCI funding (on March 20, 2020). 16 Sen. Gary Peters, “Peters, Stabenow Reintroduce Legislation Providing $10 Billion to Support Small Business Lending,” press release, February 5, 2021, at https://www.peters.senate.gov/newsroom/press-releases/peters-stabenow-reintroduce-legislation-providing-10-billion-to-support-small-business-lending. 17 Council of Development Finance Agencies, “Small Business Access to Capital Act,” at https://www.cdfa.net/cdfa/cdfaweb.nsf/pages/SSBCI.html. 18 For further information and analysis of the Paycheck Protection Program, see CRS Report R46284, COVID-19 Relief Assistance to Sm all Businesses: Issues and Policy Options, by Robert Jay Dilger, Bruce R. Lindsay, and Sean Lowry . 19 U.S. House of Representatives, Committee on Financial Services, “Supporting Small and Minority-Owned Businesses T hrough the Pandemic,” majority staff hearing memorandum, February 1, 2021, at https://democrats-financialservices.house.gov/UploadedFiles/020421_NSIDMP_Small_Biz_Hrg_Memo.pdf; U.S. House of Representatives, Committee on Financial Services, Subcommittee on National Security, International Development and Monetary Policy, “Supporting Small and Minority-Owned Businesses T hrough the Pandemic,” subcommittee hearing, February 4, 2021, at https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=407099; U.S. Senate, Committee on Banking, Housing and Urban Affairs, “T he Coronavirus Crisis: Next Steps for Rebuilding Main Street,” committee hearing, February 25, 2021, at https://www.banking.senate.gov/hearings/the-coronavirus-crisis-next -steps- Congressional Research Service 4 State Small Business Credit Initiative: Implementation and Funding Issues During their internal negotiations on the reconciliation bil , Democratic congressional leaders amended S. 258 to reserve  $2.5 bil ion for businesses owned and controlled by social y and economical y disadvantaged individuals, including minority-owned businesses ($1.5 bil ion in an initial al ocation, plus $1 bil ion for an incentive program for states that demonstrate “robust support,” as defined by the Secretary of the Treasury, for businesses owned and controlled by social y and economical y disadvantaged individuals);  $500 mil ion for tribal governments;  at least $500 mil ion for businesses, including independent contractors and sole proprietors, with fewer than 10 employees; and  $500 mil ion for technical assistance to smal businesses that need legal, accounting, financial, and other kinds of advice in applying for smal business support programs. Among other things, the amended bil would also require states and other jurisdictions to submit a plan on how they would expeditiously deliver funds to help smal businesses respond to and recover from the pandemic and a plan to encourage program participation by minority depository institutions (MDIs) and community development financial institutions (CDFIs). The amended bil would also al ow Treasury to create a multi-state participation program that would al ow states to automatical y deem a person or business eligible for their SSBCI program if that person or business were already participating in the other state’s SSBCI program. The House Committee on Financial Services included the amended SSBCI bil language in its portion of the budget reconciliation bil (H.R. 1319), which was agreed to (29-24) on February 10, 2021, and reported to the House Committee on the Budget. The House Committee on the Budget agreed to the budget reconciliation bil (19-16), which included the amended SSBCI bil language, on February 22, 2021, and reported the bil to the full House on February 24, 2021. The House passed H.R. 1319 (219-212) on February 27, 2021. SSBCI Programs The SSBCI provided funding to expand existing or create new state smal business investment programs, including capital access programs, loan participation programs, loan guarantee programs, collateral support programs, venture capital programs, and any other small business smal business credit or equity support program that meets the SSBCI'’s program requirements.

State Capital Access Programs

State capital access programs (CAP) are loan portfolio insurance programs that enable "small “smal businesses to obtain credit to help them grow and expand their business."³⁴”20 Under a CAP, when a participating lender originates a loan, the lender and borrower combine to contribute a percentage of the loan or line of credit into a reserve fund, which is held by the lender. Under the SSBCI, the for-rebuilding-main-street ; and Sen. Pat T oomey, “ Toomey Opening Statement at Banking Hearing on COVID and Small Businesses,” February 25, 2021, at https://www.banking.senate.gov/newsroom/minority/toomey-opening-statement -at-banking-hearing-on-covid-and-small-businesses. 20 U.S. Department of the T reasury, “SSBCI Program Profile: Capital Access Program,” at http://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI_Program_Profile_Capital_Access_Program_FINAL_May_17.pdf . Congressional Research Service 5 State Small Business Credit Initiative: Implementation and Funding Issues contribution must be from 2% to 7% of the amount borrowed. Typical ycontribution must be from 2% to 7% of the amount borrowed. Typically, the contributions range from 3% to 4%. The state then matches the combined contribution and sends that amount to the lender, who deposits the funds into the lender-held reserve fund. State CAPs encourage lending to small smal businesses because the reserve fund reduces the lender'’s risk of losses by being available to cover any losses on any of the loans in the lender'’s CAP portfolio. Interest rates, maturity, collateral, and other loan terms are negotiated between the lender and the borrower.³⁵

21 Under the SSBCI, approved state CAPs are eligible for federal funding equal to the amount of the insurance premiums paid by the borrower and the lender into the lender-held reserve fund, as calculated on a loan-by-loan basis. The state may use SSBCI funding to make its contribution to the lender-held reserve fund. States may also supplement the federal contribution with state or private funds if they choose to do so.³⁶

22 Subject to some restrictions, SSBCI state CAP loans may be used for most business purposes, "“including, but not limited to: start-up costs, working capital, business procurement, franchise fees, equipment, inventory, and the purchase, construction, renovation, or tenant improvements of an eligible place of business that is not for passive real estate investment purposes."³⁷”23 In addition, the borrower must have 500 employees or fewer at the time that the loan is enrolled in the program and the loan amount may not exceed $5 million.³⁸

mil ion.24 State Loan Participation Programs

State loan participation programs enable "small “smal businesses to obtain medium to long-term financing, usuallyusual y in the form of term loans."³⁹”25 States may structure loan participation programs in two ways: (1) by purchasing a portion of a loan originated by a lender (also known as a purchase transaction or purchase participation) or (2) by participating in the loan as a co-lender (also known as a companion loan). In a companion loan, a lender originates a senior loan and the state originates a second loan, which is usuallyusual y subordinate to the lender'’s senior loan should a default occur, to the same borrower. State loan participation programs encourage lending to small smal businesses because the lender is able to diversify its risk of loss by sharing its exposure to loan losses with the state. Interest rates, maturity, collateral, and other loan terms for purchase transactions and purchase participations are negotiated between the lender and the borrower, although the state may seek to approve the loan terms prior to closing. For companion loans, the state and lender negotiate interest rates, maturity, collateral and other loan terms.⁴⁰

26 Subject to some restrictions, loans in SSBCI state loan participation programs may be used for most business purposes (start-up costs, working capital, business procurement, franchise fees, etc.). In addition, SSBCI state loan participation programs must target an average borrower size of 500 employees or fewer and may not extend credit to borrowers with more than 750 21 U.S. Department of the T reasury, “SSBCI Program Profile: Capital Access Program.” 22 U.S. Department of the T reasury, “SSBCI Program Profile: Capital Access Program.” 23 U.S. Department of the T reasury, “SSBCI Program Profile: Capital Access Program.” State capital access programs (CAPs) under the SSBCI program may not enroll the unguaranteed portions of Small Business Association ( SBA) guaranteed or other federally guaranteed loans without the express, prior written consent of T reasury. Also, restrictions apply to refinancing and other uses. 24 U.S. Department of the T reasury, “SSBCI Program Profile: Capital Access Program.” 25 U.S. Department of the T reasury, “SSBCI Program Profile: Loan Participation Program,” at http://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI_Program_Profile_Loan_Participation_FINAL_May_17.pdf . 26 U.S. Department of the T reasury, “SSBCI Program Profile: Loan Participation Program.” Congressional Research Service 6 State Small Business Credit Initiative: Implementation and Funding Issues of 500 employees or fewer and may not extend credit to borrowers with more than 750 employees. They must also target an average loan amount of $5 million mil ion or less and may not extend credit for any single loan exceeding $20 million.⁴¹

mil ion.27 State Loan Guarantee Programs

State loan guarantee programs enable "small “smal businesses to obtain term loans or lines of credit"” by providing the lender "“with the necessary security, in the form of a partial guarantee, for the lender to approve a loan or line of credit."⁴²”28 The guarantee percentage is determined by the states and lenders but, under the SSBCI, may not exceed 80% of loan losses. Also, origination and annual utilization utilization fees are determined by each state to defray the program'’s cost. Under the SSBCI, fees may range from 0% to 3% of the loan amount. States typicallytypical y establish limits on the amount of loans any one lender can originate in the program and have a cash reserve to cover anticipated losses on the guarantees. Interest rates, maturity, collateralcol ateral, and other loan terms are typically typical y negotiated between the lender and the borrower, although in some cases loan terms are subject to state approval and, in many cases, the state and lender will wil discuss and negotiate loan terms and guarantee options prior to reaching agreement to approve the loan and issue a guarantee.⁴³

29 Subject to some restrictions, loans in SSBCI state loan guarantee programs may be used for most business purposes. In addition, SSBCI state loan guarantee programs must target an average borrower size of 500 employees or fewer and may not guarantee credit to borrowers with more than 750 employees. They must also target an average loan amount of $5 million mil ion or less and may not guarantee credit for any single loan exceeding $20 million.⁴⁴

mil ion.30 State Collateral Support Programs

State collateral support programs are "“designed to enable financing that might otherwise be unavailable unavailable due to a collateral shortfall."⁴⁵shortfal .”31 They provide pledged collateral accounts to lenders to enhance the collateral coverage of individual loans. Lenders are required to have at least 20% of their own capital at risk in each loan. Interest rates, maturity, collateral, and other loan terms are negotiated between the lender and the borrower. The state and lender negotiate the amount of cash collateral to be pledged by the state. In practice, state collateral support is rarely provided for more than 50% of the loan value.⁴⁶

32 Subject to some restrictions, SSBCI state collateral support program loans may be used for most business purposes. In addition, SSBCI state collateral support programs must target an average borrower size of 500 employees or fewer and may not support credit to borrowers with more than 750 employees. They must also target an average loan amount of $5 million mil ion or less and may not support credit for any single loan exceeding $20 million.⁴⁷

mil ion.33 27 U.S. Department of the T reasury, “SSBCI Program Profile: Loan Participation Program.” 28 U.S. Department of the T reasury, “SSBCI Program Profile: Loan Guarantee Program,” at http://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI_Program_Profile_Loan_Guarantee_FINAL_May_17.pdf . 29 U.S. Department of the T reasury, “SSBCI Program Profile: Loan Guarantee Program.” 30 U.S. Department of the T reasury, “SSBCI Program Profile: Loan Guarantee Program.” 31 U.S. Department of the T reasury, “SSBCI Program Profile: Collateral Support Program,” at http://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI_Program_Profile_Collateral_Support_FINAL_May_17.pdf . 32 U.S. Department of the T reasury, “SSBCI Program Profile: Collateral Support Program.” 33 U.S. Department of the T reasury, “SSBCI Program Profile: Collateral Support Program.” Congressional Research Service 7 State Small Business Credit Initiative: Implementation and Funding Issues State Venture Capital Programs State Venture Capital Programs

State venture capital programs provide "“investment capital to create and grow start-up and early- stage businesses."⁴⁸”34 They come in two forms: a state-run fund, which may include private investors, that invests directly in businesses and a fund of funds that invests in other venture capital funds that, in turn, invest in individual businesses.⁴⁹35 In both cases, the day-to-day management of the fund is typicallytypical y outsourced to a professional firm. Investments are typically typical y equity (stock) and hybrid investments, such as preferred equity and subordinated debt. Terms are negotiated between the business owner and the venture capital fund. The standard life of most state venture capital funds is 12 years, and individual fund investments are typicallytypical y for 3 years to 7 years.⁵⁰

36 Subject to some restrictions, SSBCI state venture capital program investments may be used for most business purposes. In addition, SSBCI state venture capital programs must target their investments to businesses that have 500 employees or fewer and may not invest in businesses with more than 750 employees. They must also target an average investment of $5 millionmil ion or less and may not make a single investment exceeding $20 million.⁵¹

mil ion.37 SSBCI Funding

P.L. 111-240 appropriated $1.5 billion bil ion to the Department of the Treasury for the SSBCI program, including the "“reasonable costs of administering the program."⁵²”38 The 50 states, American Samoa, the District of Columbia, Guam, Puerto Rico, the Northern Mariana Islands, the U.S. Virgin Islands, and, in some instances, municipalities were eligible for funding, with the amount available available to each state, territory, and municipality determined by a formula contained in the act (described later in this section).

As mentioned, H.R. 1319 would appropriate $10 bil ion for the program in FY2021, with the funding available until expended (except that al disbursements and remaining obligations on September 30, 2030, “shal be rescinded and deposited into the general fund of the Treasury”). Application Process Application Process

To receive SSBCI funding, states, American Samoa, the District of Columbia, Guam, Puerto Rico, the Northern Mariana Islands, and the U.S. Virgin Islands were required to file a notice of intent to apply for funding with Treasury by November 26, 2010. After filing a notice of intent to 34 U.S. Department of the T reasury, “SSBCI Program Profile: Venture Capital Program,” at http://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI_Program_Profile_Venture_Capital_FINAL_May_17.pdf . 35 U.S. Department of the T reasury, “SSBCI Program Profile: Venture Cap ital Program.” 36 U.S. Department of the T reasury, “SSBCI Program Profile: Venture Capital Program.” 37 U.S. Department of the T reasury, “SSBCI Program Profile: Venture Capital Program.” 38 12 U.S.C. §5708(b). T reasury reports that SSBCI administrative expenses, which include the cost of government employee salaries, contract support, and reimbursement to the T reasury OIG for program audits, were $5.393 million in FY2011, $4.746 million in FY2012, and $6.431 million in FY2013; and is estimated to be $8,299,000 in FY2014. See U.S. Department of the Treasury, State Sm all Business Credit Initiative: FY2013 President’s Budget Subm ission , pp. 3, 8, at http://www.treasury.gov/about/budget -performance/Documents/16%20-%20FY%202013%20SSBCI%20CJ.pdf; U.S. Department of the Treasury, State Sm all Business Credit Initiative: FY2014 President’s Budget, pp. 3, 8, at http://www.treasury.gov/about/budget-performance/CJ14/16.%20SSBCI%20CJ%20FINAL%20ok.pdf; and U.S. Department of the T reasury, State Sm all Business Credit Initiative: FY2015 President’s Budget, pp. 3, 9, at http://www.treasury.gov/about/budget-performance/CJ15/21.%20SSBCI.pdf. Congressional Research Service 8 State Small Business Credit Initiative: Implementation and Funding Issues intent to apply for funding with Treasury by November 26, 2010. After filing a notice of intent to apply for funding, they were required to submit to Treasury an application for funding by June 27, 2011. Municipalities were al owed2011.

Municipalities were allowed to apply for funding only in the event their state did not participate in the program. Municipalities were eligible to apply for funding up to the total amount of their state'state’s SSBCI allotmental otment, with the final approved amounts apportioned based on their proportionate share of the population of all al approved municipal applicants in that state, based on the most recent available decennial census.⁵³39 Eligible municipalities were required to submit to Treasury an application for funding by September 27, 2011.

The application for funding requested information concerning such items as

•  the amount requested;
•  how the funds are to be used (state capital access program, collateral support program, loan participation program, loan guarantee program, venture capital program, or other small smal business support program);
•  confirmation that, at a minimum, $1 of public investment will wil result in at least $1 of new private credit; that there is a reasonable expectation the funding will wil result in new small smal business lending of at least 10 times the amount of the SSBCI federal contribution; that the funding targets small smal businesses with 500 employees or fewer, does not support borrowers that have more than 750 employees, targets loans with an average principal of $5 million mil ion or less, and does not extend credit support to loans that exceed $20 million;
• mil ion;  documentation describing the operational capacity, skillsskil s, and experience of the applicant' applicant’s management team in operating capital access and other small smal business capital support programs;
•  documentation describing the internal accounting and administrative control systems used to safeguard against waste, loss, unauthorized use, and misappropriation; and
•  documentation describing how the participant planned to use the funds "“to to provide access to capital for small smal businesses (1) in low- and moderate-income communities, (2) in minority communities, (3) in other underserved communities, and to (4) women- and minority-owned small businesses."⁵⁴

smal businesses.”40 The Funding Formula

The SSBCI funding formula took into account the number of jobs and job losses for each state in proportion to the aggregate number of jobs and job losses nationally. Specificallynational y. Specifical y, it was based on the average of (1) the number of individuals employed in each state in December 2007 compared with the number of individuals employed in each state in December 2008 and (2) the number of individuals individuals unemployed in each state in December 2009 compared with the number of individuals unemployed nationally unemployed national y in December 2009. After accounting for Treasury'’s anticipated 39 12 U.S.C. §5703(d)(6). If more than three municipalities or combinations of municipalities from the same state are approved, T reasury is required to allocate federal funds to the three municipalities (or combination of municipalities) with the largest populations. See 12 U.S.C. §5703(d)(5). 40 U.S. Department of the T reasury, “State Small Business Credit Initiative: Application,” at http://www.treasury.gov/resource-cent er/sb-programs/Documents/SSBCI%20Application.pdf. Congressional Research Service 9 State Small Business Credit Initiative: Implementation and Funding Issues s anticipated administrative costs, each participating state was guaranteed a minimum allotmental otment of 0.9% of available available funding ($13.168 mil ion).41 H.R. 1319 uses the same al ocation formula but replaces December 2007 with December 2019, December 2008 with December 2020, and December 2009 with December 2021. Also, as mentioned, there would be a separate $500 mil ion al ocation for tribal governments “in the proportion the Secretary determines appropriate including with consideration to available employment and economic data regarding such tribal government.” Funding was (and would be) provided in three instal ments (cal edfunding ($13.168 million).⁵⁵

Funding was provided in three installments (called tranches), each approximately one-third of the participant'’s approved allotmental otment. The first tranche was provided "“immediately following the receipt of the fully signed Allocation Agreement."⁵⁶ AllotmentAl ocation Agreement.”42 Al otment agreements described how states were to comply with program requirements and were signed after the state's ’s application was approved.

Prior to the receipt of the second and third tranches, each state was required to certify that it had expended, transferred, or obligated at least 80% of the previous disbursement to, or for the account of, one or more approved state programs.⁵⁷43 Treasury was authorized to recoup misused funds should the state be found in default of the allocational ocation agreement and could terminate any portion of an allotmental otment that Treasury had not disbursed within two years of the date on which the allocational ocation agreement with the state was signed. By statute, all SSBCI allocational SSBCI al ocation agreements expired on March 31, 2017.

To encourage states to utilize their funds expeditiously, H.R. 1319 would require states to receive their second tranche (second one-third al otment) within three years and their third and final tranche (last one-third al otment) within six years of their approval date to participate in the program. States failing to do so, would need to return their remaining SSBCI funds to Treasury, and Treasury would be required to either return the funds to the general fund or real ocate the funds to other participating states. State-by-State Allotments By the original State-by-State Allotments

By the June 27, 2011, application deadline, 48 states, American Samoa, the District of Columbia, Guam, Puerto Rico, the Northern Mariana Islands, and the U.S. Virgin Islands had submitted an application to participate in the program. Collectively, they requested approximately $1.4 bil ion $1.4 billion in funding.⁵⁸44 North Dakota and Wyoming did not apply. Alaska later withdrew its application. Five municipalities (one in Alaska, two in North Dakota, and two in Wyoming) subsequently requested $39.5 millionmil ion in SSBCI funding.⁵⁹45 Funding was allottedal otted to Anchorage, Alaska ($13.168 millionmil ion); a Laramie, Wyoming, led consortium of 17 municipalities ($13.168 million); mil ion); a Mandan, North Dakota, led consortium of 37 municipalities and an Indian tribe 41 T reasury anticipated that its total administrative costs over the lifetime of the SSBCI program would be about $36.85 million. 42 U.S. Department of the T reasury, “State Small Business Credit Initiative: Frequently Asked Questions,” at http://www.treasury.gov/resource-center/sb-programs/Pages/ssbci-faqs.aspx#gen3. 43 U.S. Department of the T reasury, “St ate Small Business Credit Initiative: Frequently Asked Questions.” 44 Applicants were entitled to the funding provided by the SSBCI formula. American Samoa requested $10,418,500. T he minimum SSBCI allotment is $13,168,350. All other applicants requested the amount provided by the SSBCI formula. See U.S. Government Accountability Office (GAO), State Sm all Business Credit Initiative, GAO-12-173, December 7, 2011, p. 9, at http://www.gao.gov/assets/590/586727.pdf. 45 GAO, State Small Business Credit Initiative, GAO-12-173, December 7, 2011, p. 9. Congressional Research Service 10 link to page 15 link to page 15 State Small Business Credit Initiative: Implementation and Funding Issues ($9.711 mil iona Mandan, North Dakota, led consortium of 37 municipalities and an Indian tribe ($9.711 million); and a Carrington, North Dakota, led consortium of 36 municipalities ($3.458 million).

mil ion). Table 1 shows the amount of SSBCI funding that was awarded to each state and territory (hereinafter referred to as states unless otherwise noted) and the types of small smal business investment programs supported. As shown on Table 1, California received the largest allotment al otment ($167.75 millionmil ion) and American Samoa, which requested less than the minimum guaranteed allotment al otment, received the smal est al otment ($10.5 mil ion). States used, received the smallest allotment ($10.5 million).

States use SSBCI funding to support small the following smal business investment programs: 23 supportsupported a capital access program, 40 supportsupported a loan participation program, 20 support a supported a loan guarantee program, 16 supportsupported a collateral support program, and 38 supportsupported a venture capital program.

Approximately 32.5% of SSBCI funds have been allocatedwere al ocated to loan participation programs, 29.5% to venture capital programs, 18.4% to collateral support programs, 16.9% to loan guarantee programs, and 2.7% to capital access programs.⁶⁰

46 As mentioned previously, most states received their initial tranche in FY2011 and, as of December 31, 2016, all al 57 participants had received their first tranche, 56 had received their second tranche, and 53 had received their third tranche.⁶¹

States were allowed47 States were (and would continue to be) al owed to use up to 5% of their initial tranche, and up to 3% of their second and third tranches, for administrative expenses related to implementing an approved small approved smal business investment program. They were (and would continue to be) also subject to several reporting requirements. For example, states had to submit quarterly reports to Treasury describing the use of allocatedal ocated funds for each approved program, including the total amount of allocatedal ocated funds used for direct and indirect administrative costs, the total amount of allocated al ocated funds used, the amount of program income generated, and the amount of charge-offs against the federal contributions to the reserve funds set aside for any approved CAP. States were also required to submit annual reports to Treasury, by March 31 of each year, containing, among other things, transaction-level data for each loan or investment made with SSBCI funds for that year.

Audits, Evaluation Reports, and Program Adjustments

Program Adjustments P.L. 111-240 required Treasury'’s OIG to conduct, supervise, and coordinate audits and investigations into the use of SSBCI funds. The act also required GAO to perform an annual audit of the SSBCI program. P.L. 113-188, the Government Reports Elimination Act of 2014, eliminated this requirement.

Treasury's OIG released its first evaluation report of Treasury' 46 U.S. Department of the T reasury, State Small Business Credit Initiative: A Summary of States’ Quarterly Reports as of Decem ber 31, 2016, p. 10, at https://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI_Quarterly_Report_Summary_December_2016.pdf . 47 U.S. Department of the T reasury, State Small Business Credit Initiative: A Summary of States’ Quarterly Reports as of Decem ber 31, 2016, p. 1. Congressional Research Service 13 State Small Business Credit Initiative: Implementation and Funding Issues Treasury’s OIG released its first evaluation report of Treasury’s implementation of the SSBCI on August 5, 2011, and its first audit of a state'’s use of SSBCI funds (California) on May 24, 2012. It has completed audits of 24 participants'’ use of SSBCI funds (California, Montana, Vermont, Michigan, Texas, Massachusetts, Delaware, New Jersey, Alabama, Missouri, Washington, Kansas, Florida, West Virginia, Illinois Il inois, South Carolina, American Samoa, North Carolina, Idaho, Indiana, Tennessee, the North Dakota Mandan consortium, Rhode Island, and New York).⁶²

48 GAO released annual audits of the SSBCI program on December 7, 2011, December 5, 2012, December 18, 2013, and December 11, 2014.

GAO's 2011 Audit

GAO found that Treasury issued an initial set of ’s Audits The SSBCI was authorized on September 27, 2010. Because the program was new, it took Treasury nearly three months to post the initial set of SSBCI policy guidelines and application materials viaon its website on (December 21, 2010, and "was able to review, approve and obtain signed allocation agreements with and distribute first installments).49 The program official y started in January 2011, when Treasury obtained signed al ocation agreements and distributed first instal ments of funds to two states in January 2011."⁶⁶ In.50 However, in response to feedback from states, the SBA, and other federal agencies, Treasury revised its policy guidelines and application paperwork in April 2011 "“to better articulate what documentation was required for both the application and review processes."⁶⁷”51 The two previously approved states were asked to sign an amended allocational ocation agreement that incorporated the revisions.

GAO reported that several states indicated they had GAO’s first annual audit, issued on December 7, 2011, reported that several states, worried that they might be found in noncompliance with Treasury’s rules and regulations, delayed submitting their SSBCI applications until Treasury issued its final applicationfinalized its policy guidance, and 37 states submittedwaited to submit their applications in June 2011, the final month that applications were allowed. Although some states had postponed the submission of their applications, GAO found that "despite the delay in providing application guidance, applicants generally viewed Treasury officials as helpful throughout the application process—providing answers to most questions immediately and determining answers as soon as possible when not readily available."⁶⁸

until June 2011, the final month that applications were al owed. GAO also found that Treasury finalizeddid not finalize its disbursement procedures for second and third installmentsinstal ments of SSBCI funds atuntil the beginning of November 2011. Treasury officials reported that despite this delay, no state, at that time, had expended 80% of its initial disbursement to support loans or investments to small smal businesses. However, GAO noted that while Treasury was finalizing the disbursement procedures "states were potentially delayed in receiving their remaining SSBCI funding."⁶⁹ GAO noted that one state reportedone state reported that it was ready for its second installmentinstal ment before Treasury had finalized the disbursement procedures but was told by Treasury officials that it would have to wait until the disbursement procedures were finalized.⁷⁰

52 GAO concluded its 2011 audit by noting that Treasury had not yet developed SSBCI performance measures and recommended that the agency do so to enable it to “be in a position to determine whether the SSBCI program is effective in achieving its goals.”53 48 U.S. Department of the T reasury, Office of Inspector General (OIG), Small Business Lending Fund Program Oversight Office, Sm all Business Lending Fund Oversight Reports, at https://oig.treasury.gov/Office-of-Small-Business-Lending-Fund-Program-Oversight . An audit of Louisiana’s use of SSBCI funds was issued on January 9, 2014, and removed from the T reasury OIG’s website on February 19, 2015, pending further review. T he OIG later determined that the work performed was not sufficient to support the findings and conclusions in the rep ort under generally accepted government auditing standards. T he audit report will not be reissued. 49 U.S. Government Accountability Office (GAO), State Small Business Credit Initiative, GAO-12-173, December 7, 2011, p. 21, at http://www.gao.gov/assets/590/586727.pdf. 50 GAO, State Small Business Credit Initiative, GAO-12-173, p. 14. 51 GAO, State Small Business Credit Initiative, GAO-12-173, p. 14. 52 GAO, State Small Business Credit Initiative, GAO-12-173, p. 16. 53 GAO, State Small Business Credit Initiative, GAO-12-173, p. 21. Congressional Research Service 14 State Small Business Credit Initiative: Implementation and Funding Issues In response to GAO’measures for the SSBCI program. According to GAO, "measuring performance allows organizations to track progress toward their goals and gives managers crucial information on which to base decisions" and "until such measures are developed and implemented Treasury will not be in a position to determine whether the SSBCI program is effective in achieving its goals."⁷¹

Treasury's Response to GAO's 2011 Audit: Performance Measures

In response to GAO's audit, in January 2012, Treasury adopted three performance goals to measure its administration of the program and four performance indicators to measure SSBCI outcomes.

outcomes. The three administrative performance goals were

•  90% of requests for modifications to allocational ocation agreements are approved or rejected within 90 days of receiving a final submission;
•  90% of requests for subsequent disbursements under existing allocation al ocation agreements are approved or rejected within 90 days of receipt of a formal submission; and
•  90% of quarterly reports are received within 5 days of the deadline.⁷²

54 Treasury tracked these performance goals continuously and reported 12-month data to the Office of Management and Budget as part of its annual budget submission.

The four performance indicators were

•  the amount of SSBCI funds used over time, as reported on SSBCI quarterly reports;
• reports;  the volume and dollar amounts of loans or investments supported by SSBCI funds, as reported on SSBCI annual reports;
•  the amount of private sector leverage, as reported on SSBCI annual reports; and
•  the estimated number of jobs created or retained, as reported on SSBCI annual reports.

reports. Treasury reported this performance data internallyinternal y to the Assistant Secretary of Financial Institutions on an annual basis. GAO’s second annual SSBCI audit, issued on December 5, 2012, found that states with preexisting smal business programs distributed their SSBCI funds quicker than other states because the state administrative infrastructure necessary to distribute the funds was already in place, and lenders were already familiar with the programs. States without preexisting smal business programs reported thatInstitutions on an annual basis. Treasury also noted that these outcomes were not directly within its control, given that it approves and provides funding for state loan and investment programs, but the participating states are responsible for designing, establishing, and implementing the state programs. In addition, Treasury noted that

GAO's 2012 Audit

GAO's second annual SSBCI audit, issued on December 5, 2012, found that as of June 30, 2012, Treasury had transferred $468 million in SSBCI funds to states (about one-third of total SSBCI funds) and states had disbursed about $150 million of that amount (about 10% of total SSBCI funds). GAO reported that the states interviewed said that "disbursing funds was much faster for state programs that were in existence before SSBCI because the infrastructure was already in place and lenders were already familiar with the programs" but that "some states implementing new programs told [GAO] that it could take time to use the funds because they had to conduct extensive outreach to lenders to make them they had to conduct extensive outreach to lenders to make them aware of the programs and encourage them to commit to small smal business lending.55 GAO noted that Treasury had, as recommended, created performance measures business lending."⁷⁴

GAO also acknowledged that, in response to its first annual audit of the SSBCI, Treasury had created performance measures "to help monitor and measure the effectiveness of SSBCI."⁷⁷SSBCI’s effectiveness.56 However, GAO noted that Treasury "“has not yet determined how and when it will wil make this information public."⁷⁸ GAO argued that although "it is still early in the program and results vary greatly across the program participants for a variety of reasons," but "Treasury should make information publicly available concerning its performance indicators" because "”57 GAO argued that this information should be made public because “performance information is an important tool for policymakers, particularly as Congress reviews and considers programs to assist smal businesses going forward.”58 54 U.S. T reasury, “Correspondence with the author,” June 22, 2012. For the first two goals, the measurement period starts once all required documentation from the requesting participating state is received. 55 GAO, Small Business Lending: Opportunities Exist to Improve Performance Reporting of Treasury’s Programs, GAO-13-76, December 5, 2012, p. 22, at http://www.gao.gov/assets/660/650555.pdf. 56 GAO, Small Business Lending: Opportunities Exist to Improve Performance Reporting of Treasury’s Programs, p. 40. 57 GAO, Small Business Lending: Opportunities Exist to Improve Performance Reporting of Treasury’s Programs, p. 40 58 GAO, Small Business Lending: Opportunities Exist to Improve Performance Reporting of Treasury’s Programs, pp. Congressional Research Service 15 State Small Business Credit Initiative: Implementation and Funding Issues In response to this recommendation, on September 25, 2013, Treasury officials made SSBCI performance information publicly available by releasingpolicymakers, particularly as Congress reviews and considers programs to assist small businesses going forward."⁷⁹

Treasury's Response to GAO's 2012 Audit: Written Policy Guidance and Publishing Performance Measures

In response to GAO's recommendation that Treasury officials make SSBCI performance information publicly available, on September 25, 2013, Treasury released the first of what would become an annual summary report of performance information drawn from SSBCI participants'’ annual reports.⁸²59 The summary report contained information drawn from SSBCI participants' 2012 annual reports and included data related to each of the Treasury'’s four performance measures (amount of SSBCI funds used over time; volume and dollar amounts or investments supported by SSBCI funds; amount, in dollars, of private-sector leverage; and estimated number of jobs created or retained) as of December 31, 2012.

GAO's 2013 Audit

GAO'. GAO’s third annual SSBCI audit, issued on December 18, 2013, found that although the pace of participant SSBCI spending had increased since the second annual audit, participants were still stil facing several challengeschal enges in using their SSBCI funds. For example, as of June 30, 2013, Treasury had disbursed about $811 million mil ion in SSBCI funds to participants (about 54% of total SSBCI funds). EightOnly 8 participants had received their third and final tranche, 19 participantspartic ipants had received their second tranche, and 30 participants were "still “stil working to use their first disbursement of SSBCI funding."⁸³

”60 Participants told GAO that Treasury'’s delay in finalizing the program'’s guidelines and the learning associated with implementing a relatively large number of new small smal business programs had slowed spending.61had slowed spending. However, they also reported that those issues were now largely resolved and "were issues that they would expect to occur with the implementation of any new program."⁸⁴ Participants also told GAO the unexpected low demand for some SSBCI capital access programs (CAP) further slowed their SSBCI spending. They explained that it took some time for them to reallocatereal ocate funds from SSBCI programs experiencing low demand to those experiencing higher demand.62 Some participants also reported that some large banks were reluctant to participate in the program due to the variation of SSBCI programs across the nation and the need to “tailor different processes to each SSBCI participant’s program.”63 GAO’s fourth, and final,experiencing higher demand.⁸⁵

Treasury's Response to GAO's 2013 Audit: Targets for Program Performance Measures and Outreach

GAO's 2014 Audit

GAO's fourth annual SSBCI audit, issued on December 11, 2014, found that although the pace of participant SSBCI spending had increased since its third audit, officials from three of the 10 SSBCI participants it interviewed reported that some banks were still stil reluctant to participate in the program because they were unfamiliar with it or perceived that it would increase scrutiny from regulators.⁹²64 Officials from three of the 10 SSBCI participants interviewed also indicated that "“there continues to be a lack of clarity in Treasury'’s guidance regarding the use of SSBCI funds for certain transactions.”65 40-41. 59 U.S. Department of the T reasury, State Small Business Credit Initiative: A Summary of States’ 2012 Annual Reports, September 25, 2013, at http://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI%20Summary%20of%20States%202012%20Annual%20Reports%20FINAL.pdf. 60 GAO, State Small Business Credit Initiative: Opportunities Exist to Enhance Performance Measurement and Evaluation, GAO-14-97, December 18, 2013, p. 9, at http://www.gao.gov/products/gao-14-97. 61 GAO, State Small Business Credit Initiative: Opportunities Exist to Enhance Performance Measurement and Evaluation, p. 13. 62 GAO, State Small Business Credit Initiative: Opportunities Exist to Enhance Performance Measurement and Evaluation, p. 16. 63 GAO, State Small Business Credit Initiative: Opportunities Exist to Enhance Performance Measurement and Evaluation, p. 16. 64 GAO, Small Business Credit Programs: Treasury Continues to Enhance Performance Measurement and Evaluation but Could Better Com m unicate and Update Results, GAO-15-105, December 11, 2014, p. 19, at http://www.gao.gov/assets/670/667450.pdf. 65 GAO, Small Business Credit Programs: Treasury Continues to Enhance Performance Measurement and Evaluation but Could Better Com m unicate and Update Results, p. 19. Congressional Research Service 16 State Small Business Credit Initiative: Implementation and Funding Issues Treasury’SSBCI funds for certain transactions."⁹³

Treasury's Response to GAO's 2014 Audit

Treasury's Inspector General Evaluation Reports

s Inspector General Evaluation Reports On August 5, 2011, Treasury'’s OIG issued its first evaluation report examining the SSBCI program.66 After examining Treasury’s policy guidelines and the al ocations OIG issued its first evaluation report examining the SSBCI program.⁹⁸ The OIG praised Treasury officials for "seeking [the OIG's] assistance during the developmental stage of the program."⁹⁹ The OIG also noted that Treasury officials had previously made several revisions to the SSBCI's initial policy guidelines, allocation agreement, and application materials following consultation with the OIG, including modifying "the SSBCI application to require that applicants detail their oversight and compliance regimes prior to receiving program approval."¹⁰⁰

After examining Treasury's policy guidelines and the allocation agreement between Treasury and participating states, the OIG made nine recommendations for improvements. For example, the OIG recommended that Treasury improve the understanding of state oversight responsibilities by more clearly defining what is meant by the terms "terms such as “supervision and oversight and accountability"” and by setting "“minimum standards for participating state oversight of SSBCI recipients, including defining a participating state'’s role in overseeing compliance with loan use requirements and restrictions."¹⁰¹”67 The OIG also recommended that Treasury "either modify the allocation agreement or amend the policy guidelines to require participating states to make a representation that it is aware of, monitoring, and enforcing compliance with the policy guidelines and other restrictions applicable to the other participants [lenders and borrowers] in the program."¹⁰²

”68 Treasury took several immediate actions to address the OIG'’s recommendations. For example, in response to the OIG’s recommendation that Treasury more clearly define the terms "“supervision and oversight and accountability"” and establish minimum standards for participating state oversight of SSBCI recipients, Treasury revised the SSBCI FAQ document on its website "“to combine all al applicable oversight requirements in one place"” and "“elaborate on the specific duty that each provision imposes upon the participating state."¹⁰³”69 In addition, Treasury took into consideration the OIG'’s recommendations as it developed its "“SSBCI National Standards for Compliance and Oversight"” document, which was released on May 15, 2012.¹⁰⁴

70 Treasury'’s Inspector General Use of SSBCI Funds Audit Reports

On May 24, 2012, Treasury'’s OIG released the first of a planned series of audits of state use of SSBCI funds, starting with California.¹⁰⁵71 Treasury'’s OIG has completed audits of 24 participants'’ use of SSBCI funds (California, Montana, Vermont, Michigan, Texas, Massachusetts, Delaware, New Jersey, Alabama, Missouri, Washington, Kansas, Florida, West Virginia, IllinoisIl inois, South Carolina, American Samoa, North Carolina, Idaho, Indiana, Tennessee, the North Dakota Mandan consortium, Rhode Island, and New York).¹⁰⁶72 A summary of the OIG'’s findings for each state follows, starting with California.

In each audit, the OIG reviewed a judgmental sample of small business loans or investments to " 66 U.S. Department of the T reasury, OIG, “State Small Business Credit Initiative: T reasury Needs to Strengthen State Accountability for Use of Funds,” August 5, 2011, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/SBLF11002.pdf. 67 U.S. Department of the T reasury, OIG, “State Small Business Credit Initiative: T reasury Needs to Strengthen State Accountability for Use of Funds,” p. 19. 68 U.S. Department of the T reasury, OIG, “State Small Business Credit Initiative: T reasury Needs to Strengthen State Accountability for Use of Funds,” p. 20. 69 U.S. Department of the T reasury, OIG, “State Small Business Credit Initiative: T reasury Needs to Strengthen State Accountability for Use of Funds,” p. 10. 70 U.S. Department of the T reasury, “SSBCI National Standards for Compliance and Oversight,” May 15, 2012, at http://www.treasury.gov/resource-center/sb-programs/Pages/ssbci.aspx. 71 U.S. Department of the T reasury, OIG, Small Business Lending Fund: California Needs to Improve Its Oversight of Program s Participating in the State Sm all Business Credit Initiative, May 24, 2012, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIG-SBLF-12-003.pdf. 72 U.S. Department of the T reasury, OIG, Small Business Lending Fund Program Oversight Office, Small Business Lending Fund Program and State Sm all Business Credit Initiative Oversight Reports, at https://oig.treasury.gov/Office-of-Small-Business-Lending-Fund-Program-Oversight . Congressional Research Service 17 State Small Business Credit Initiative: Implementation and Funding Issues In each audit, the OIG reviewed a judgmental sample of smal business loans or investments to “determine whether [the loans or investments] complied with program requirements for loan use, capital at risk, and other restrictions."¹⁰⁷ The OIG then determined if there were "any instances of reckless or intentional misuse."¹⁰⁸”73 Treasury was required to recoup any funds the OIG identifies as intentionally identified as intentional y or recklessly misused.¹⁰⁹ To date, only74 Only Texas, New Jersey, West Virginia, and the North Dakota Mandan consortium were found to be in full compliance with all SSBCI al SSBCI requirements.

California

Treasury' Treasury’s OIG determined that California had properly used the majority of the $3.6 million in mil ion in SSBCI loans it examined, but it identified $133,250 in loan loss reserves funded under California's Small California’s Smal Business Loan Guarantee Program that did not comply with SSBCI program requirements.¹¹⁰75 The OIG indicated that these noncompliant expenditures "“constitute a 'reckless' ‘reckless’ misuse of funds as defined by Treasury guidance, which under the provisions of the Small Smal Business Jobs Act must be recouped."¹¹¹”76 The OIG also identified $160,988 in administrative expenses charged to the SSBCI program that were "“not adequately supported by actual expenses incurred or with proper documentation to validate the costs claimed."¹¹²”77 In addition, the OIG reported that "“42 or approximately 58 percent, of the 73 loans [OIG] tested lacked all al of the required borrower and lender assurances."¹¹³

”78 Treasury agreed to recoup from California the $133,250 in loan loss reserves identified by the OIG as a reckless misuse of funds; required California to provide additional supporting documentation for its SSBCI administrative expenses; and instructed California program officials to address missing borrower and lender certifications and assurances. Treasury subsequently noted that any loans still stil missing required assurances and certifications had been unenrolled and that all that al other certification issues had been resolved.¹¹⁴

79 Montana Treasury’Montana

Treasury's OIG found that Montana had misused $2.73 millionmil ion of the $4.9 million mil ion in SSBCI funds it examined because the funds were used for passive real estate investments and the refinancing of prior debt, which "“are prohibited under the Small Smal Business Jobs Act or SSBCI Policy Guidelines."¹¹⁵”80 The OIG also found that $3,426 in personnel costs incurred for 73 U.S. Department of the T reasury, OIG, Small Business Lending Fund: California Needs to Improve Its Oversight of Program s Participating in the State Sm all Business Credit Initiative, p. 2. 74 U.S. Department of the T reasury, OIG, Small Business Lending Fund: California Needs to Improve Its Oversight of Program s Participating in the State Sm all Business Credit Initiative, p. 1. 75 U.S. Department of the T reasury, OIG, Small Business Lending Fund: California Needs to Improve Its Oversight of Program s Participating in the State Sm all Business Credit Initiative, p. 3. 76 U.S. Department of the T reasury, OIG, Small Business Lending Fund: California Needs to Improve Its Oversight of Program s Participating in the State Sm all Business Credit Initiative, p. 3. 77 U.S. Department of the T reasury, OIG, Small Business Lending Fund: California Needs to Improve Its Oversight of Program s Participating in the State Sm all Business Credit Initiative, p. 3. 78 U.S. Department of the T reasury, OIG, Small Business Lending Fund: California Needs to Improve Its Oversight of Program s Participating in the State Sm all Business Credit Initiative, p. 3. 79 U.S. Department of the T reasury, OIG, Small Business Lending Fund: California Needs to Improve Its Oversight of Program s Participating in the State Sm all Business Credit Initiative, pp. 13-14. 80 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Montana’s Use of Funds Received from the State Sm all Business Credit Initiative, September 27, 2012, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIGSBLF12006.pdf. Congressional Research Service 18 State Small Business Credit Initiative: Implementation and Funding Issues The OIG also found that $3,426 in personnel costs incurred for administering SSBCI funds were not allowable or allocableal owable or al ocable because the costs were not properly supported as required by OMB Circular A-87.¹¹⁶

81 The OIG "“did not find the misuse of funds to be intentional or reckless as Montana sought guidance from Treasury before enrolling the loans."¹¹⁷”82 The OIG reported that Treasury officials did not provide definitive guidance on the permissibility of passive real estate loans and informed Montana that refinancing prior debt to the same lender was allowableal owable if the prior debt had matured and new underwriting had occurred. The OIG noted that Treasury attempted to clarify the Smal the Small Business Job Act'’s prohibition on the refinancing of prior debt by defining refinancing, which is not defined in the act. The OIG challengedchal enged Treasury'’s conclusion "“that the statutory prohibition on refinancing the same lenders'’ loans pertained only to existing debt that had not yet matured and that refinancing debt after it matures constitutes '‘refunding,'’ a permitted use."¹¹⁸”83 The OIG noted that there were no references in the Small Smal Business Jobs Act or in Treasury'’s SSBCI policy guidelines concerning "“re-funding."¹¹⁹

”84 Treasury agreed to notify participating states that loans for passive real estate are considered a misuse of funds and encourage them to review their loan enrollments to ensure compliance with guidance that was in place at the time the loans were made.¹²⁰85 Treasury also agreed to "“provide a clear and rigorous analysis documenting how Treasury concluded that some refinancing of existing debt from the same lender, or '‘re-funding,'’ is consistent with the statutory language, or amend the program procedural guidance to remove that possibility."¹²¹”86 Treasury also found that Montana was unable to provide the necessary documentation for the $3,426 in personnel costs cited by the OIG in its review of the state'’s SSBCI administrative expenses and that those costs would be disal owed.87 Vermont Treasury’would be disallowed.¹²²

Vermont

Treasury's OIG examined 26 loans issued under Vermont'’s four SSBCI programs and found that Vermont'Vermont’s interest rate subsidy program ($931,000 in SSBCI funding) did not comply with the requirements established by its allocational ocation agreement with Treasury.¹²³88 Because the state estimated its interest rate subsidies, the OIG found that Vermont'’s quarterly reports to Treasury "“do not reflect the State'’s actual use of funds for the program"” and, therefore, "“the State cannot provide Treasury with accurate information for measuring the leverage achieved with SSBCI funds."¹²⁴ The OIG recommended that Treasury require Vermont to provide a subaccounting of all funds transferred in connection with the interest rate subsidy program as well ”89 81 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Montana’s Use of Funds Received from the State Sm all Business Credit Initiative, pp. 2, 6. 82 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Montana’s Use of Funds Received from the State Sm all Business Credit Initiative, pp. 2, 9. 83 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Montana’s Use of Funds Received from the State Sm all Business Credit Initiative, p. 3. 84 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Montana’s Use of Funds Received from the State Sm all Business Credit Initiative, p. 12. 85 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Montana’s Use of Funds Received from the State Sm all Business Credit Initiative, p. 16. 86 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Montana’s Use of Funds Received from the State Sm all Business Credit Initiative, p. 16. 87 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Montana’s Use of Funds Received from the State Sm all Business Credit Initiative, p. 18. 88 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Vermont’s Use of Federal Funds for Capital Access and Credit Support Program s, November 30, 2012, p. 2, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIGSBLF13001.pdf. 89 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Vermont’s Use of Federal Funds for Congressional Research Service 19 State Small Business Credit Initiative: Implementation and Funding Issues The OIG recommended that Treasury require Vermont to provide a subaccounting of al funds transferred in connection with the interest rate subsidy program as wel as program income generated from the use of such funds. In addition, the OIG recommended that Treasury determine whether Vermont "“is in general default of its AllocationAl ocation Agreement due to its non-compliance with accounting and lender/borrower assurance requirements, and whether future funding to the State should be reduced, suspended, or terminated."¹²⁵”90 The OIG also found that $216,820 in administrative expenses charged to the SSBCI program did not comply with program guidance.¹²⁶

91 Treasury agreed to require Vermont to provide a subaccounting of all al the funds transferred in connection with the interest rate subsidy program as well as all wel as al program income generated from the use of such funds.¹²⁷92 Treasury also agreed to determine whether "“there has been a general event of default under Vermont's Allocation’s Al ocation Agreement resulting from the State'’s non-compliance with the grants management common rule or lender/borrower assurance requirements [and], if such an event has occurred and has not been adequately cured, determine whether it warrants a reduction, suspension, or termination of future funding to the State."¹²⁸”93 In addition, Treasury agreed to disallowdisal ow the $216,820 in administrative expenses charged to the SSBCI program by Vermont unless the state provides supporting documentation in accordance with OMB Circular A-87.¹²⁹

Michigan

Treasury'94 Michigan Treasury’s OIG found that Michigan had used the majority of the $38.5 millionmil ion in SSBCI loans it examined properly, but it identified "“approximately $2.524 millionmil ion in misuse, of which $2.5 million mil ion was used to finance lender purchase transactions that did not involve extensions of additional credit to borrowers; $3,000 supported a partner buy-out, a prohibited use; and $21,000 was used to pay the CAP insurance premium on a loan closed and funded prior to Michigan's ’s acceptance into the SSBCI program and Treasury's allocation’s al ocation of funds to the State."¹³⁰”95 The OIG determined that the $21,000 used to pay the CAP insurance premium was a "reckless"“reckless” misuse of funds that must be recouped. Although the OIG did not find the $2.5 million mil ion used to finance lender purchase transactions that did not involve extensions of additional credit to borrowers to be a similarly reckless misuse of funds, it did question whether the purchase transactions were "“consistent with the intent of the [Small Smal Business Jobs] Act to help small smal businesses expand, grow, and create jobs."¹³¹”96 It recommended that Treasury develop guidance for such transactions. In addition, the OIG found $8,506 in administrative expenses charged to the SSBCI program that Capital Access and Credit Support Program s, pp. 2-3. 90 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Vermont’s Use of Federal Funds for Capital Access and Credit Support Program s, pp. 3-4. 91 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Vermont’s Use of Federal Funds for Capital Access and Credit Support Program s, p. 3. 92 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Vermont’s Use of Federal Funds for Capital Access and Credit Support Program s, p. 15. 93 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Vermont’s Use of Federal Funds for Capital Access and Credit Support Program s, p. 15. 94 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Vermont’s Use of Federal Funds for Capital Access and Credit Support Program s, p. 14. 95 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Michigan’s Use of Federal Funds for Capital Access and Other Credit Support Program s, December 13, 2012, pp. 2-3, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIGSBLF13002.pdf. 96 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Michigan’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 3. Congressional Research Service 20 State Small Business Credit Initiative: Implementation and Funding Issues addition, the OIG found $8,506 in administrative expenses charged to the SSBCI program that were incurred prior to the date Michigan was approved to participate in the program and notified of its SSBCI allocational ocation. The OIG recommended that those expenses be disallowed.¹³²

disal owed.97 Treasury agreed to issue guidance to address the conditions under which loan purchase transactions would be permitted.¹³³98 Treasury also agreed to recoup the $21,000 used to pay the CAP insurance premium on a loan closed and funded prior to Michigan'’s acceptance into the SSBCI program and Treasury's allocation’s al ocation of funds to the state and to disallowdisal ow the $8,506 in administrative expenses that were incurred prior to the date Michigan was approved to participate in the program and notified of its SSBCI allocation.¹³⁴

Texas

Treasury'al ocation.99 Texas Treasury’s OIG examined five investments, totaling $6.3 millionmil ion, financed by the Texas Small Smal Business Venture Capital Program and $105,000 of administrative costs that the state charged against SSBCI funds. The OIG found the program in full compliance with all al SSBCI requirements. The OIG credited the state's "’s “success in ensuring full compliance with SSBCI requirements" requirements” to Texas's "’s “use of a checklist to evaluate compliance with program requirements prior to the completion of each transaction."¹³⁵

”100 Massachusetts

Treasury' Treasury’s OIG contracted with an independent certified public accounting firm to audit Massachusetts'Massachusetts’s use of SSBCI funds. As of June 30, 2012, Massachusetts had obligated or spent approximately $6.6 million mil ion of the SSBCI funds disbursed, including $4 million mil ion for the Massachusetts Growth Capital Corporation (MGCC) loan participation program, $2.1 millionmil ion for the Massachusetts Business Development Corporation (MBDC) loan participation program, and $211,000 for the MassachusettsMassachuset s Capital Access Program (MCAP). Massachusetts also incurred approximately $321,000 in administrative costs.

The accounting firm reviewed the state'’s administrative costs and a randomly selected sample of 35 state SSBCI transactions (3 loan participation loans and 32 capital access loans) to determine their compliance with SSBCI requirements. The audit found that Massachusetts charged $200,000 in administrative costs to the SSBCI program that did not comply with program guidance and that the state did not include in its quarterly reports to Treasury $51,248 of program income. The audit also found that 34 of the 35 transactions were in compliance with program requirements. The accounting firm noted that a transaction for $237,000 made by the MBDC loan participation program appeared to be prohibited by SSBCI policy guidelines because it involved an SBA- guaranteed loan. Massachusetts officials reportedly "“believed that the loan in question was compliant with program requirements because Treasury'’s SSBCI Policy Guidelines prohibit the enrollment of only the unguaranteed portions of federallyfederal y-guaranteed loans. Therefore, they reasonably believed the prohibition on credit enhancement did not pertain to the guaranteed 97 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Michigan’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 3. 98 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Michigan’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 13. 99 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Michigan’s Use of Federal Funds for Capital Access and Other Credit Support Program s, pp. 15-16. 100 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Texas’ Use of Federal Funds for Other Credit Support Program s, January 29, 2013, p. 2, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIGSBLF13003.pdf. Congressional Research Service 21 State Small Business Credit Initiative: Implementation and Funding Issues portion of federal y-guaranteed loans.”101reasonably believed the prohibition on credit enhancement did not pertain to the guaranteed portion of federally-guaranteed loans."¹³⁶ In addition, the audit found that Massachusetts did not obtain complete borrower and lender assurances for 89% of the loans reviewed by the time of loan closing.¹³⁷

102 The OIG recommended that Treasury "“revise its program guidance to make the enrollment of federallyfederal y-guaranteed loans a clear prohibition, disallowdisal ow $200,000 in administrative expenses unless the Commonwealth can provide adequate support for such costs, and require the Commonwealth to demonstrate that it has a compliant system for allocatingal ocating administrative costs."¹³⁸”103 The OIG also recommended that Treasury "“determine whether there has been a general event of default of the AllocationAl ocation Agreement resulting from Massachusetts'’s non-compliance with lender/borrower assurance requirements, materiallymaterial y inaccurate certifications, and failure to report program income."¹³⁹

”104 In response to the OIG'’s recommendations, Treasury indicated it was in the process of revising its program guidance on the enrollment of federallyfederal y guaranteed loans. It also stated that it will wil determine whether Massachusetts has adequately cured its noncompliance with program requirements and whether additional action is warranted. Massachusetts clarified that although it reported $200,000 in administrative expenses; it did not charge the SSBCI fund for these expenses and does not intend to seek reimbursement from SSBCI for them. Massachusetts also reported that many of the transactions examined during the audit "“were made in the early stage of the SSBCI program, before suggested reporting forms were promulgated by Treasury."¹⁴⁰

”105 Delaware Treasury’Delaware

Treasury's OIG found that as of September 30, 2012, Delaware had obligated or spent approximately $4.1 million mil ion of its first SSBCI disbursement of $4.3 millionmil ion—$80,883 for 36 loans enrolled in the Delaware Access Program and approximately $4 millionmil ion for 14 loans enrolled in the Delaware Strategic Fund (DSF) Loan Program. The OIG reviewed a random sample of 26 loans (19 from the Delaware Access Program and 7 from the DSF Loan Program) that were enrolled as of September 30, 2012, to determine if they were in compliance with program requirements.¹⁴¹

requirements.106 The OIG did not identify any instances of intentional or reckless misuse of funds. However, it did find that although Delaware obtained most borrower and lender assurances at loan closing, these assurances did not contain all al required affirmations.¹⁴²107 Several assurances were also missing 101 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Massachusetts’ Use of Federal Funds for Capital Access and Other Credit Support Program s, May 14, 2013, p. 7, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIGSBLF13007.pdf. 102 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Massachusetts’ Use of Federal Funds for Capital Access and Other Credit Support Program s, pp. 1-3. 103 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Massachusetts’ Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 3. 104 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Massachusetts’ Use of Federal Funds for Capital Access and Other Credit Suppo rt Program s, p. 3. 105 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Massachusetts’ Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 19. 106 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Delaware’s Use of Federal Funds for Capital Access and Other Credit Support Program s, March 29, 2013, p. 11, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIGSBLF13006.pdf. 107 Participating states must require the financial institution lender to obtain an assurance from each borrower stating that the loan proceeds will not be used for an impermissible purpose under the SSBCI program. For example, the loan Congressional Research Service 22 State Small Business Credit Initiative: Implementation and Funding Issues Several assurances were also missing signatures or dates. In addition, the OIG found that Treasury became aware of Delaware's ’s noncompliance with the assurance requirements in May 2012, but it was not until October 2012 that Treasury directed Delaware'’s officials to obtain the missing assurances for each loan. By November 2012, Delaware had retroactively obtained these assurances.

The OIG recommended that Treasury "“examine the reasons why appropriate and timely actions were not taken to address Delaware'’s compliance and certification issues, and take appropriate actions to strengthen its compliance monitoring and enforcement of program requirements."¹⁴³”108 In response to this recommendation, Treasury reported that it "“is in the process of adjusting the quarterly certification process to cover circumstances where a participating state has a known unresolved item of noncompliance."¹⁴⁴”109 Also, Delaware officials reported that they had implemented "additional “additional precautions, including random audits of SSBCI loans, to ensure compliance with use of proceeds, capital-at-risk, and assurance requirements."¹⁴⁵

New Jersey

Treasury'”110 New Jersey Treasury’s OIG contracted with an independent certified public accounting firm to audit New Jersey'Jersey’s use of SSBCI funds.¹⁴⁶111 The accounting firm found that as of June 30, 2012, New Jersey had spent about $2.9 millionmil ion of its first SSBCI disbursement of $11.1 million—$1.76 million for mil ion—$1.76 mil ion for two loan participations, $675,000 for a credit guarantee, and $500,000 for a direct loan.¹⁴⁷

112 The accounting firm reviewed all al four transactions and determined that New Jersey complied with all al program requirements in administering the $2.9 millionmil ion in SSBCI funds. The OIG concluded that New Jersey's "’s “success in ensuring full compliance was attributable to several best practices that the New Jersey Economic Development Authority [which administers New Jersey's ’s SSBCI program] employed to enhance its program oversight,"” including the use of an "“SSBCI Application Eligibility Criteria Checklist that listed each of the required SSBCI assurances and specific SSBCI program requirements"” and that had to be completed and signed prior to each transaction.¹⁴⁸

Alabama

Treasury' transaction.113 Alabama Treasury’s OIG contracted with an independent certified public accounting firm to audit Alabama'Alabama’s use of SSBCI funds. The accounting firm reviewed all al 14 loans enrolled in Alabama's loan guarantee program, totaling approximately $3.8 million’s proceeds must be used for an approved “business purpose” and they cannot be used to repay delinquent federal or state income taxes, unless the borrower has a payment plan in place with the relevant taxin g authority; repay taxes held in trust or escrow; reimburse funds owed to any owner, including any equity injection or injection of capital for the business’s continuance; or purchase any portion of the ownership interest of any owner of the business. 108 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Delaware’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 3. 109 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Delaware’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 4. 110 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Delaware’s Use of Federal Funds for Capital Access and Other Credit Support Program s, pp. 3-4. 111 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: New Jersey’s Use of Federal Funds for Other Credit Support Program s, February 27, 2013, p. 2, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIGSBLF13005.pdf. 112 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: New Jersey’s Use of Federal Funds for Other Credit Support Program s, p. 4. 113 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: New Jersey’s Use of Federal Funds for Other Credit Support Program s, p. 8. Congressional Research Service 23 State Small Business Credit Initiative: Implementation and Funding Issues loan guarantee program, totaling approximately $3.8 mil ion, made between the signing of the SSBCI allocational ocation agreement on August 24, 2011, and June 30, 2012. The accounting firm also reviewed the $45,172 in administrative expenses Alabama charged against SSBCI funds during that time period to ensure these expenses were allowableal owable, reasonable, and allocable.

al ocable. The audit found that Alabama complied with all al program requirements in administering the $3.8 million mil ion of SSBCI funds used as of June 30, 2012. The OIG attributed "“the state'’s success in ensuring full compliance"” to the Alabama Department of Economic and Community Affairs' ’ requirement that a checklist containing SSBCI requirements be completed prior to each loan enrollment to ensure the loan was in full compliance with SSBCI requirements.¹⁴⁹114 The audit also found that Alabama had overstated the amount of SSBCI funds used by approximately $1 million mil ion in its March 31, 2012, quarterly report and by approximately $4 millionmil ion in its June 30, 2012, quarterly report. The OIG indicated that the errors occurred because Alabama incorrectly included private-lender contributions to loan loss reserves for loans guaranteed with SSBCI funds. However, because Treasury identified and corrected the inaccuracies prior to the audit, the OIG made no recommendations concerning the errors.¹⁵⁰

Missouri

Treasury'115 Missouri Treasury’s OIG contracted with an independent certified public accounting firm to audit Missouri'Missouri’s use of SSBCI funds. The accounting firm reviewed all al 17 SSBCI transactions between the signing of the SSBCI allocational ocation agreement on May 23, 2011, and March 31, 2012. These transactions included 16 investments, totaling $6.6 millionmil ion, by the Missouri Innovation, Development, and Entrepreneurship Advancement (IDEA) Fund and one loan, totaling $511,135, by the Grow Missouri Loan Fund. The accounting firm also reviewed the $151,568 in administrative expenses Missouri charged against SSBCI funds during that time period to ensure these expenses were allowableal owable, reasonable, and allocableal ocable. Because the audit of the IDEA Fund revealed a prohibited party relationship, the audit'’s scope was expanded to include seven additional IDEA Fund transactions made between April 1, 2012, and September 30, 2012, "“to to determine whether additional prohibited party relationships existed."¹⁵¹

”116 The OIG found that Missouri "“properly used over 96% of the $7.3 millionmil ion in SSBCI funds expended, and that all al related administrative costs were compliant with program requirements."¹⁵² ”117 However, the audit revealed that a $240,000 venture capital investment made by the IDEA Fund "“constituted a reckless misuse of funds, as defined by Treasury"” because a director of the board that approved the investment "“had a prohibited party relationship with the company that received the investment based on the director's controlling’s control ing interest in the investee."¹⁵³”118 The director had recused herself from the vote approving the investment. The OIG noted that the board should 114 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Alabama’s Use of Federal Funds for Capital Access and Other Credit Support Program s, June 4, 2013, p. 2, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIGSBLF13008.pdf. 115 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Alabama’s Use of Federal Funds for Capital Access and Other Credit Support Program s, pp. 1-2. 116 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Missouri’s Use of Federal Funds for Other Credit Support Program s, July 24, 2013, p. 2, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIGSBLF13009.pdf. 117 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Missouri’s Use of Federal Funds for Other Credit Support Program s, p. 3. 118 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Missouri’s Use of Federal Funds for Other Credit Support Program s, p. 3. Congressional Research Service 24 State Small Business Credit Initiative: Implementation and Funding Issues recused herself from the vote approving the investment. The OIG noted that the board should have known that prohibited party relationships are not allowedal owed because the SSBCI policy guidelines "guidelines “require every borrower and investee receiving funds to certify that such a relationship did not exist."¹⁵⁴”119 The OIG recommended that Treasury recoup the $240,000 investment. Missouri disagreed with the OIG'’s finding that it "“recklessly misused funds,"” arguing that the board was in compliance with its own conflict-of-interest policy and that the relationship with the "potentially “potential y interested director"” was "“disclosed repeatedly in the application materials which were provided to the Board"” and that the investment "“was made on the merits through a rigorous and independent process."¹⁵⁵”120 Nonetheless, Missouri took measures "“to remedy the situation and prevent similar issues in the future."¹⁵⁶”121 For example, the board administering the IDEA Fund "“replenished the SSBCI program account in the amount of the misused funds and unenrolled the transaction," ” amended its conflict-of-interest policy to comply with the SSBCI guidelines on conflicts of interest, and created a checklist to ensure that each transaction supported by SSBCI funds is in compliance with the SSBCI guidelines on conflicts of interest.¹⁵⁷

122 Treasury agreed to recoup the $240,000 from Missouri. Treasury also agreed to "“determine whether Missouri has adequately cured its non-compliance with the related party prohibition, requirements for assurances, and certification filings"” and if further action is warranted.¹⁵⁸

Washington

Treasury'123 Washington Treasury’s OIG contracted with an independent certified public accounting firm to audit Washington'Washington’s use of SSBCI funds. The accounting firm reviewed all al of the state'’s $5.3 millionmil ion in in SSBCI loans issued by Washington'’s Enterprise Cascadia Loan Participation Program and all al of the $1.7 million mil ion in investments issued by the state'’s W Fund Venture Capital Program between the signing of the SSBCI allocational ocation agreement on October 31, 2011, and June 30, 2012. The accounting firm also reviewed the $92,291 in administrative expenses Washington charged against SSBCI funds during that time period to ensure these expenses were allowableal owable, reasonable, and allocable.¹⁵⁹

and al ocable.124 The audit determined that all $7.1 million al $7.1 mil ion in loans and venture capital investments "“complied with SSBCI program requirements and restrictions, and that borrower and lender assurances were complete and timely."¹⁶⁰”125 However, the audit found that the $92,291 in administrative expenses reported to Treasury "“was overstated by $5,779 as a result of an accounting change [comprised of payroll costs for administration of the SSBCI program that were incurred during the reporting period, but subsequently transferred to an alternative funding source] that was not reflected in the state's SSBCI Quarterly Report."¹⁶¹ 119 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Missouri’s Use of Federal Funds for Other Credit Support Program s, p. 3. 120 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Missouri’s Use of Federal Funds for Other Credit Support Program s, p. 26. 121 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Missouri’s Use of Federal Funds for Other Credit Support Program s, p. 22. 122 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Missouri’s Use of Federal Funds for Other Credit Support Program s, p. 22. 123 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Missouri’s Use of Federal Funds for Other Credit Support Program s, p. 22. 124 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Washington’s Use of Federal Fun ds for Capital Access and Other Credit Support Program s, August 15, 2013, pp. 1, 2, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIG-SBLF-13-011.pdf. 125 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Washington’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 2. Congressional Research Service 25 State Small Business Credit Initiative: Implementation and Funding Issues state’s SSBCI Quarterly Report.”126 When the auditors brought the overstatement to their attention, Washington officials notified Treasury of the need to adjust their SSBCI Quarterly Report to reflect the cost transfer. Treasury "“advised Washington that it would authorize the adjustment upon completion of the OIG'’s audit.”127 Kansas Treasury’s audit."¹⁶²

Kansas

Treasury's OIG contracted with an independent certified public accounting firm to audit Kansas's ’s use of SSBCI funds. The accounting firm reviewed all al of the state'’s $1.53 millionmil ion in SSBCI loans issued by the Kansas Capital Multiplier Multiplier Loan Fund and the $696,950 in investments issued by the Kansas Capital Multiplier Venture Fund between the signing of the SSBCI allocational ocation agreement on June 28, 2011, and March 31, 2012. The accounting firm also reviewed the $14,585 in administrative expenses Kansas charged against SSBCI funds during that time period to ensure these expenses were allowableal owable, reasonable, and allocable.

al ocable. The audit found that Kansas "“appropriately used most of the SSBCI funds it had expended"” but questioned three $250,000 loans that were issued to affiliated entities as part of a $31 million mil ion aggregate financial arrangement.¹⁶³128 The OIG noted that there is a $20 million mil ion cap on SSBCI loans made under other credit support programs (OCSPs) and that Treasury'’s guidance "“does not address how the cap should be applied when funds are used to make companion loans comprising a larger financial package or where multiple loans are made to affiliated entities."¹⁶⁴”129 The OIG recommended that Treasury clarify the requirement that SSBCI funds not be used to support loans that exceed a principal amount of $20 millionmil ion. Treasury agreed to revise the SSBCI policy guidelines to clarify the requirement.¹⁶⁵

130 The audit also found that Kansas inaccurately reported in its March 31, 2012, SSBCI quarterly report a $173,822 advance for administrative costs issued to NetWork Kansas (a nonprofit entity that, among other activities, administers the Kansas Capital Multiplier Loan Fund and the Kansas Capital Multiplier Venture Fund) as a loan and that $29,247 of that advance was not subsequently reported as administrative expenses in the state'’s June 30, 2012, SSBCI quarterly report because those spent funds were previously incorrectly reported as a loan.¹⁶⁶131 In addition, the audit found that $13,181 of the $29,247 should be disalloweddisal owed by Treasury because the funds were used to pay 126 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Washington’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 2. 127 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Washington’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 7. 128 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Kansas’ Use of Federal Funds for Other Credit Support Program s, September 5, 2013, p. 2, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIG-SBLF-13-013.pdf. 129 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Kansas’ Use of Federal Funds for Other Credit Support Program s, p. 2. 130 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Kansas’ Use of Federal Funds for Other Credit Support Program s, p. 18. Kansas officials explained that the three lo ans in question were “ made to separate legal entities which were operated as separate businesses at separate locations, but who sold product to a common buyer [and] not contrived to avoid the $20 million cap on loans.” Officials also explained that “while the similarity in names and inadvertent language in the applications make the independence of the loans more difficult to ascertain, review of the facts shows SSBCI loan support was not to a single loan in excess of $20 million. Rather, SSBCI funds were used to support separate loans to separate businesses.” See U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Kansas’ Use of Federal Funds for Other Credit Support Programs, p. 20. 131 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Kansas’ Use of Federal Funds for Other Credit Support Program s, pp. 3, 12, 13. Congressional Research Service 26 State Small Business Credit Initiative: Implementation and Funding Issues by Treasury because the funds were used to pay audit and tax consulting costs that were not properly allocatedal ocated through a cost allocational ocation plan or an indirect cost proposal as required by OMB Circular A-87.¹⁶⁷132 Treasury agreed to work with Kansas "“to correct its quarterly statements, remove the $13,181 in disalloweddisal owed audit and tax consulting costs from the State'’s quarterly reports, and review Kansas'’ cost allocational ocation plan for administrative costs."¹⁶⁸

Florida

Treasury' costs.”133 Florida Treasury’s OIG reviewed all al 7 SSBCI venture capital investments, totaling $37 million, mil ion, issued by the Florida Venture Capital Program and all al 17 SSBCI loans, totaling approximately $14.6 million, mil ion, issued by the Florida Loan Participation Program (11 loans, totaling $9.75 millionmil ion); Florida Direct Loans Program (1 loan, totaling $3.5 millionmil ion); Florida Loan Guarantee Program (3 loans, totaling $1.37 millionmil ion); and Florida Capital Access Program (2 loans, totaling $780 for portfolio insurance) between the signing of the SSBCI allocational ocation agreement on August 24, 2011, and December 31, 2012.¹⁶⁹134 The OIG also reviewed the $378,634 in administrative expenses Florida charged against SSBCI funds during that time period to ensure these expenses were allowable al owable, reasonable, and allocable.

al ocable. The OIG found that Florida "“properly used the majority (92%) of the SSBCI funds it expended" ” and that "“23 of the 24 transactions ... sampled were compliant with program guidelines related to prohibited relationships, maximum transaction amounts, use-of-proceeds, capital-at-risk, and other restrictions noted in the [Small Smal Business Jobs] Act and SSBCI Guidelines."¹⁷⁰”135 The questionable transaction involved the use of $4 million mil ion in SSBCI funds in a $34.7 million mil ion investment "“that involved multiple equity instruments, which ... exceeded the $20 million mil ion restriction in the [Small Smal Business Jobs] Act intended [to] be placed on the amount of credit support that may be extended to a recipient."¹⁷¹”136 The OIG concluded that "“although two equity instruments were involved [$4 millionmil ion from the SSBCI and $30.7 millionmil ion from private capital], the transaction constituted one investment package because if the business were to fail, both equity instruments would be affected."¹⁷²”137 The OIG recommended that Treasury "“revise the SSBCI Policy Guidelines to clarify how the $20 million mil ion restriction on credit support should be applied 132 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Kansas’ Use of Federal Funds for Other Credit Support Program s, p. 13. 133 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Kansas’ Use of Federal Funds for Other Credit Support Program s, p. 19. T reasury also agreed to inform Kansas “ that the State is required to obtain lender assurances from relevant companion lenders in future transactions, but agrees with Kansas that retroactively collecting companion lender assurances [as was recommended by the OIG] is impractical and unnecessary.” See U.S. Department of the T reasury, OIG, State Sm all Business Credit Initiative: Kansas’ Use of Federal Funds for Other Credit Support Program s, p. 18. T reasury agreed to clarify the “ SSBCI National Standards for Compliance and Oversight” document to specify which companion lenders must submit assurances. 134 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Florida’s Use of Federal Funds for Capital Access and Other Credit Support Program s, November 15, 2013, pp. 1, 13, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIGSBLF14002R.pdf. 135 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Florida’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 7. 136 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Florida’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 7. 137 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Florida’s Use of Federal Funds for Capital Access and Other Credit Support Program s, pp. 7, 8. Congressional Research Service 27 State Small Business Credit Initiative: Implementation and Funding Issues restriction on credit support should be applied when an investment involves multiple equity instruments."¹⁷³”138 Treasury agreed to revise the program' program’s guidance concerning the $20 millionmil ion credit support restriction.¹⁷⁴

139 The OIG also found that Florida had overstated its administrative expenses by approximately $55,000. Florida officials indicated that the overstatement "“occurred because of incorrect selection criteria used to pull administrative cost information from the state accounting system" ” following the merger of several state agencies. Florida officials informed Treasury of the error and made adjustments to the state'’s administrative expenses to account for the error in their March 31, 2013, SSBCI quarterly report.¹⁷⁵

140 In addition, the OIG found that Florida had "“overstated by approximately $23 million mil ion the amount of SSBCI funds that had been obligated because it included FLVCP [Florida Venture Capital Program] reserves that were set aside for future follow-on investments to existing investees."¹⁷⁶ ”141 Florida officials asserted that their reporting of these funds was in compliance with the definitions provided in the SSBCI policy guidelines and FAQ documents at the time that the funds were reported.¹⁷⁷142 However, state officials also noted that Treasury had informed them in February 2013 that Florida's "’s “reserve commitment letters did not meet Treasury'’s criteria for designation as obligated funds"” and that the state had submitted an updated disbursement request with its second tranche of funding, which was received in June 2013.¹⁷⁸143 Subsequently, "“Florida adjusted its quarterly statements for June 30, 2012, September 30, 2012, and December 31, 2012, to exclude amounts shown as obligated pursuit to the FLVCP reserve commitment letters."¹⁷⁹”144 Treasury also agreed to determine whether Florida has adequately addressed its reporting of obligated funds and whether additional action is warranted.¹⁸⁰

West Virginia

Treasury'145 West Virginia Treasury’s OIG reviewed a random sample of 28 SSBCI loans and investments, totaling approximately $9.5 millionmil ion, made by West Virginia'’s four SSBCI programs (13 from the Seed Capital Co-Investment Fund, 11 from the West Virginia Collateral Support Program, 3 from the Subordinated Debt Program, and 1 from the West Virginia Loan Guarantee Program) issued between the signing of the allocational ocation agreement on November 18, 2011, and June 30, 2013. The OIG also examined a sample ($170,533) of West Virginia'’s $181,784 in SSBCI administrative costs. The program was found to be in full compliance with all al SSBCI requirements.¹⁸¹

Illinois

Treasury's OIG examined a random sample of 48 SSBCI loans and investments, totaling $34.5 million, issued by five SSBCI programs in Illinois (35 from the Illinois146 138 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Florida’s Use of Federal Funds fo r Capital Access and Other Credit Support Program s, p. 11. 139 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Florida’s Use of Federal Funds for Capital Access and Other Credit Support Program s, pp. 12, 15. 140 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Florida’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 9. 141 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Florida’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 4. 142 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Florida’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 19. 143 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Florida’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 19. 144 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Florida’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 20. 145 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Florida’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 15. 146 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: West Virginia’s Use of Federal Funds Congressional Research Service 28 State Small Business Credit Initiative: Implementation and Funding Issues Illinois Treasury’s OIG examined a random sample of 48 SSBCI loans and investments, totaling $34.5 mil ion, issued by five SSBCI programs in Il inois (35 from the Il inois Participation Loan Program, 8 from the Invest IllinoisIl inois Venture Fund, 3 from the IllinoisIl inois Capital Access Program, 1 from the Collateral Support Program, and 1 from the Conditional Direct Loan Program) between the signing of the allocational ocation agreement on July 26, 2011, and March 31, 2013. The OIG also examined a sample ($589,882) of the state'’s $1.03 millionmil ion in SSBCI administrative costs and found the sampled administrative expenses to be in full compliance with SSBCI requirements.¹⁸²

147 The OIG found that "Illinois“Il inois appropriately used most of the $34.5 millionmil ion in SSBCI funds it had expended as of March 31, 2013, but spent $105,000 to participate in a loan that was used to purchase the stock of a company representing its entire ownership interest, which is prohibited by the SSBCI Policy Guidelines."¹⁸³”148 The OIG also identified 22 other transactions "“that did not fully comply with lender sex offender certification requirements"” and found that "Illinois“Il inois neglected to execute lender certifications on the State'’s behalf as prescribed in the National Standards"” for direct loans and state-run venture capital investments.¹⁸⁴149 Also, the OIG determined that Illinois unintentionally Il inois unintentional y overstated, in the state'’s 2012 annual report, the amount of private financing associated with a loan in which the state participated by $4.7 millionmil ion. This occurred because the financing structure of the transaction was changed without the state'’s knowledge.¹⁸⁵

150 Treasury informed the OIG that it will wil recoup from IllinoisIl inois the $105,000 expenditure identified by the OIG as being prohibited, require IllinoisIl inois to modify any master agreements with lenders that do not include required language mandating that lenders notify the state of changes in the sex-offender status of their principals, and require IllinoisIl inois to provide lender certifications when it is acting as a direct lender under the SSBCI program. Treasury also indicated that it will wil work with Il inoiswith Illinois to adjust the $4.7 million mil ion overstatement in the state'’s 2012 annual report and determine whether a general default has occurred as a result of the OIG findings.¹⁸⁶

South Carolina

Treasury'151 South Carolina Treasury’s OIG examined a random sample of 38 SSBCI loans issued by South Carolina'’s two SSBCI programs (10 from the South Carolina Capital Access Program and 28 from the South Carolina Loan Participation Program), totaling $11.4 millionmil ion, between the signing of the allocational ocation agreement on July 6, 2011, and June 30, 2013. The OIG also examined South Carolina' Carolina’s $136,449 in SSBCI administrative costs.¹⁸⁷

The OIG found that South Carolina appropriately used most of its SSBCI funds "but misused 152 for Other Credit Support Program s, March 19, 2014, pp. 1-2, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIGSBLF14004R.pdf. 147 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Illinois’ Use of Federal Funds for Capital Access and Other Credit Support Program s, March 26, 2014, p. 17, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIG-SBLF-14-005R%20%28for%20web%29.pdf. 148 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Illinois’ Use of Federal Funds for Capital Access and Other Credit Support Program s, pp. 2-3. 149 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Illinois’ Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 3. 150 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Illinois’ Use of Federal Funds for Capital Access and Other Credit Support Program s, pp. 12-13. 151 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Illinois’ Use of Federal Funds for Capital Access and Other Credit Support Program s, pp. 19-20. 152 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: South Carolina’s Use of Federal Congressional Research Service 29 State Small Business Credit Initiative: Implementation and Funding Issues The OIG found that South Carolina appropriately used most of its SSBCI funds “but misused $427,500 to participate in a loan that was used to finance the building of a new church sanctuary and make renovations to the existing sanctuary, which is prohibited by the SSBCI Policy Guidelines."¹⁸⁸”153 The OIG noted, however, that although South Carolina misused those funds, the misuse was "“not reckless or intentional because SSBCI Policy Guidelines do not explicitly explic itly prohibit the use of SSBCI funds for non-secular purposes."¹⁸⁹”154 The OIG also identified eight other transactions "“that did not comply with the National Standards because the State did not verify that the borrower and lender assurances were complete and duly executed prior to the transfer of SSBCI funds."¹⁹⁰”155 South Carolina'’s administrative charges were found to be in full compliance with all with al SSBCI requirements.

Treasury informed the OIG that it will wil publish guidance to clarify that using SSBCI funds to support transactions with a non-secular identity is not a permitted business purpose and determine whether a general event of default has occurred as a result of South Carolina'’s not fully complying with borrower and lender assurance requirements.¹⁹¹156 South Carolina informed Treasury that it had added an additional line item to its internal control compliance checklist to ensure that all al borrower and lender assurance requirements are signed and dated prior to the transfer of SSBCI funds.¹⁹²

157 American Samoa

American Samoa was awarded $10.5 millionmil ion in SSBCI funds on January 12, 2012, and received its first disbursement of $3.465 millionmil ion later that month. Treasury'’s OIG found that American Samoa had not obligated or spent any SSBCI funds for credit support as of September 30, 2013. As a result, the OIG'’s audit focused on whether American Samoa'’s $50,307 in SSBCI administrative costs was "“reasonable, whether the territory was fully positioned to extend credit, and whether the territory was in compliance with the program'’s reporting and certification requirements."¹⁹³

The OIG " requirements.”158 The OIG “identified $49,155 in unsupported personnel and travel expenses that should be disallowed,"disal owed,” and found that "“American Samoa has not provided Treasury with records that would allow al ow the Department to determine whether the Territory is '‘fully positioned'’ to provide credit support to small smal businesses, as required by its Allocation Agreement."¹⁹⁴Al ocation Agreement.”159 The OIG also found that American Samoa "did not obtain Treasury' Funds for Capital Access and Other Credit Support Program s, March 26, 2014, p. 12, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIG-SBLF-14-006.pdf. 153 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: South Carolina’s Use of Federal Funds for Capital Access and Other Credit Support Program s, pp. 2-3. 154 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: South Carolina’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 3. 155 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: South Carolina’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 3. 156 I U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: South Carolina’s Use of Federal Funds for Capital Access and Other Credit Support Program s, pp. 13-14. 157 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: South Carolina’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 16. 158 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: American Samoa’s Administrative Expenses and Reporting, March 26, 2014, p. 1, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIG-SBLF-14-007.pdf. 159 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: American Samoa’s Administrative Expenses and Reporting, p. 2. Congressional Research Service 30 State Small Business Credit Initiative: Implementation and Funding Issues American Samoa “did not obtain Treasury’s prior approval for three changes to the entity designated to administer the SSBCI funds; did not submit two of its quarterly reports or its 2012 annual report to Treasury on time, causing Treasury to declare a general event of default of American Samoa's Allocation’s Al ocation Agreement; and incorrectly certified the accuracy of two quarterly reports to Treasury and did not certify the accuracy of three other quarterly reports."¹⁹⁵”160 Based on its findings, the OIG recommended that Treasury disallowdisal ow the $49,155 in unsupported administrative expenses, "“determine whether a reduction, suspension, or termination of future funding to the Territory is warranted,"” and, if funding is not terminated, "“require that the Territory first comply with the terms of its AllocationAl ocation Agreement, and approve the agreement modifications, before disbursing additional funds."¹⁹⁶

”161 Treasury informed the OIG that it will disallowwil disal ow the $49,155 in unsupported administrative costs, determine whether American Samoa has again defaulted on its allocational ocation agreement, and determine what form of remedy may be appropriate.¹⁹⁷162 Treasury also indicated that if American Samoa'Samoa’s funding is not terminated, Treasury "will “wil not disburse additional funds before requiring that the Territory first comply with the terms of the Allocation Agreement."¹⁹⁸

Al ocation Agreement.”163 Officials with American Samoa'’s Department of Commerce agreed with the recommendation to disallow disal ow the questioned SSBCI administrative expenses, which, they noted, were made by a previous American Samoa administration. However, they also noted that they were "“somewhat taken aback with the harshness and severity of the positions taken"” in the OIG'’s audit.¹⁹⁹164 They pointed out that the OIG report did not reflect the "“significant organizational issues facing the Governor which necessitated his decision with respect to the location and management of this vital program"” and that "“to the best of [their] knowledge Treasury SSBCI supported the decision made by the Governor."²⁰⁰”165 They also noted that since the audit they had filed with Treasury all al missing quarterly and annual reports, hired consultants to design and implement a compliance program for American Samoa'’s SSBCI program, and sent, in February 2014, a modified allocational ocation agreement for Treasury'’s review. They requested that Treasury approve the program modification changes this modified agreement requested and maintained that American Samoa's ’s SSBCI program now "“complies with all al Treasury regulations and guidance and is fully positioned to provide small smal businesses with credit assistance."²⁰¹

North Carolina

Treasury'”166 North Carolina Treasury’s OIG examined a random sample of 45 SSBCI loans issued by North Carolina'’s three SSBCI programs (31 were from the North Carolina Capital Access Program, 9 were from the 160 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: American Samoa’s Administrative Expenses and Reporting, pp. 2-3. 161 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: American Samoa’s Administrative Expenses and Reporting, p. 13. 162 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: American Samoa’s Administrative Expenses and Reporting, p. 17. 163 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: American Samoa’s Administrative Expenses and Reporting, p. 17. 164 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: American Samoa’s Administrative Expenses and Reporting, p. 19. 165 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: American Samoa’s Administrative Expenses and Reporting, p. 19. 166 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: American Samoa’s Administrative Expenses and Reporting, pp. 14, 19-24. Congressional Research Service 31 State Small Business Credit Initiative: Implementation and Funding Issues SSBCI programs (31 were from the North Carolina Capital Access Program, 9 were from the North Carolina Loan Participation Program, and 5 were from the North Carolina Venture Capital Fund-of-Funds Program), totaling $4.9 millionmil ion, between the signing of the allocational ocation agreement on May 23, 2011, and December 31, 2012. The OIG also reviewed 46 of the state'’s SSBCI administrative cost transactions, totaling $720,257.²⁰²

167 The OIG found that North Carolina appropriately used most of its SSBCI funds "“but [due to misrepresentations by a lender] contributed $6,690 to a reserve fund under the Capital Access Program for a loan that refinanced one previously made to the borrower by the same lender."²⁰³ ”168 The OIG noted that "“such refinancings are prohibited by the [Small Smal Business Jobs] Act and constitute a misuse of funds"” but not an intentional or reckless misuse of funds due to the lender's misrepresentations.²⁰⁴

’s misrepresentations.169 The OIG also found that North Carolina did not obtain fully compliant lender sex-offender assurances for 19 (or 42%) of the 45 transactions tested, as required.²⁰⁵170 The OIG noted that North Carolina chose to rely on annual lender certifications of compliance with this requirement, which is permitted, but it neglected to require lenders to notify the state should an event occur that rendered the certifications obsolete.

In addition, North Carolina "“inaccurately reported to Treasury the total amount of an enrolled investment on three separate occasions because it misreported the private investor'’s contribution to the investment"” and "“reported $10.3 millionmil ion in capital commitments with SSBCI funds to four angel investment funds as obligated funds even though only $2.9 million mil ion had been pledged to investees."²⁰⁶ investees.”171 The OIG expressed concern that "“while obligating funds on a multi-year basis generallygeneral y is an accepted practice,"” using capital commitments to angel investment funds with multiyear investment horizons "“to measure performance and qualifying a state for additional transfers of SSBCI funds is inappropriate and does not meet the intent of the Small Smal Business Jobs Act.”172Act."²⁰⁷ The OIG found that all al 46 administrative cost transactions it reviewed were in full compliance with SSBCI guidelines.²⁰⁸

173 The OIG recommended that Treasury (1) verify, as North Carolina had reported, that $6,690 in SSBCI funds has been withdrawn from the prohibited loan and that the SSBCI account has been reimbursed for the same amount; (2) determine whether there has been a general event of default under North Carolina's allocation’s al ocation agreement resulting from the state'’s failure to fully comply with the lender assurance requirements and for inaccurate reporting of venture capital investment amounts; (3) revise the definition of funds obligated for venture capital programs to includeinc lude only funds that have been designated for specific investees; (4) require participants to distinguish in 167 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: North Carolina’s Use of Federal Funds for Capital Access and Other Credit Support Program s, March 27, 2014, pp. 1-2, 16, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIGSBLF14009.pdf. 168 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: North Carolina’s Use of Federal Funds for Capital Access and Other Credit Support Program s, pp. 3, 8-9. 169 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: North Carolina’s Use of Federal Funds for Capital Access and Other Credit Support Program s, pp. 3, 8-9. 170 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: North Carolina’s Use of Federal Funds for Capital Access and Other Credit Support Program s, pp. 10-11. 171 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: North Carolina’s Use of Federal Funds for Capital Access and Other Credit Support Program s, pp. 3-4. 172 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: North Carolina’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 14. 173 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: North Carolina’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 16. Congressional Research Service 32 State Small Business Credit Initiative: Implementation and Funding Issues funds that have been designated for specific investees; (4) require participants to distinguish in their quarterly reports the venture capital funds previously reported as obligated to specific investees from that obligated to angel funds but not yet disbursed to investees; and (5) adopt a standard definition of funds used for all al program-reporting purposes instead of defining funds used differently for different purposes.²⁰⁹

174 Treasury informed the OIG that it will wil (1) verify that North Carolina has withdrawn SSBCI funds from the prohibited loan and replenished the SSBCI account; (2) determine whether a general event of default has occurred; (3) change its disbursement procedures to confirm prior to making a disbursement that states are not holding excess idle cash that is not likely to be expended, obligated, or transferred to small smal businesses within a reasonable time period; (4) explain in the summary quarterly reports that funds "“expended, obligated, or transferred"” include obligations to venture capital funds not yet linked to specific small smal business investments; and (5) make every effort to follow the definition of funds used in the SSBCI policy guidelines.²¹⁰

Idaho

Treasury'175 Idaho Treasury’s OIG examined a random sample of 30 SSBCI loans enrolled in the Idaho Collateral Support Program (ICSP), totaling $50.3 millionmil ion, for which Idaho provided $7.6 millionmil ion in collateral and 12 loans committed for enrollment into the ICSP, totaling $10.8 millionmil ion, for which Idaho had reserved $2 millionmil ion in collateral as of September 30, 2013. Treasury had previously reviewed Idaho'’s administrative expenses from January 2012 to September 2012 and had reduced Idaho'Idaho’s final allotmental otment by $31,806 for expenses that were not adequately supported in accordance with OMB Circular A-87. Subsequent to that review, Idaho had reported an additional $272,744 in administrative expenses as of September 30, 2013. The OIG reviewed these additional administrative expenses for compliance with SSBCI guidelines.²¹¹

176 The OIG found that Idaho appropriately used the $9.6 millionmil ion in collateral support that was reviewed but "“mistakenly overstated by $111,923 the total principal for 3 of [the] 42 loans ... reviewed because the amounts reported were not based on the final loan documents."²¹²”177 The OIG also noted that Idaho "“inaccurately reported $781,000 as Treasury-approved subsequent private financing,"” but Treasury acknowledged the mistake "“was due to inconsistent guidance to the State."²¹³

State.”178 Idaho was provided a copy of the OIG'’s audit prior to its deadline for submitting its 2013 SSBCI annual report to Treasury. As a result, the state was able to correct its report prior to submitting it to Treasury to account for two of the three loan principal amounts that were overstated. The state also indicated that it had implemented new controls in February 2014 that "“require a copy of the Bank'Bank’s promissory note to verify the actual/final loan origination amount prior to funding the collateral support account on the enrolled loan"” to ensure the amount reported is the actual 174 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: North Carolina’s Use of Federal Funds for Capital Access and Other Credit Support Program s, p. 17. 175 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: North Carolina’s Use of Federal Funds for Capital Access and Other Credit Support Program s, pp. 18, 22-23. 176 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Idaho’s Use of Federal Funds for its Collateral Support Program , May 19, 2014, pp. 2, 10, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIGSBLF14010R.pdf. 177 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Idaho’s Use of Federal Funds for its Collateral Support Program , p. 3. 178 I U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Idaho’s Use of Federal Funds for its Collateral Support Program , p. 3. Congressional Research Service 33 State Small Business Credit Initiative: Implementation and Funding Issues to ensure the amount reported is the actual amount of the executed loan.²¹⁴179 In addition, Idaho noted that it "will “wil work with Treasury to rectify the erroneous inclusion of subsequent private financing and incorrect loan origination amounts in their 2012 report."²¹⁵”180 Treasury informed the OIG that it would work with Idaho to resolve the issues identified in the audit.²¹⁶

Idaho'181 Idaho’s $272,744 in administrative expenses reported since Treasury'’s earlier audit were found to be in full compliance with SSBCI guidelines.²¹⁷

Indiana

182 Indiana At the request of Treasury SSBCI program officials, Treasury'’s OIG was asked to determine whether two investments made by the Indiana Angel Network Fund (IANF) under Indiana's ’s Venture Capital Program complied with SSBCI policy guidelines. The OIG found that the two IANF investments, one totaling $499,986 and the other totaling $300,000, involved transactions between the board chairman of Elevate Ventures and the investees.²¹⁸183 Elevate Ventures manages the IANF'’s investments on behalf of the Indiana Economic Development Corporation (IEDC), and it approved and executed the two investments in question.

The OIG found that the $499,986 investment constituted an "intentional"“intentional” misuse of funds because the board chairman of Elevate Ventures had a controlling interest and voting stock ownership of more than 10% in the investee, which created a "“prohibited related party interest."²¹⁹”184 The OIG noted that "“SSBCI Policy Guidelines prohibit an investee receiving SSBCI funds from a related interest of any such executive officer, director, principal shareholder or immediate family."²²⁰ ”185 Intentional misuse of funds "“is defined as a use of allocatedal ocated funds that the participating state or its administering entity knew was unauthorized or prohibited."²²¹

”186 The $300,000 investment was found to be in compliance with SSBCI guidelines. However, the OIG noted that the closeness of the relationship between the Elevate board chairman and the applicant (the board chairman'’s adult son was the company'’s chief executive officer), although 179 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Idaho’s Use of Federal Funds for its Collateral Support Program , pp. 16-17. 180 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Idaho’s Use of Federal Funds for its Collateral Support Program , p. 14. 181 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Idaho’s Use of Federal Funds for its Collateral Support Program , p. 14. 182 T he OIG also identified five loans, totaling approximately $9.8 million and supported by $1.3 million in SSBCI collateral, that provided interim financing of real estate acquisitions, construction projects, or equipment purchases that had been approved for the SBA’s 504/Certified Development Company (CDC) loan guaranty program. T he OIG expressed concern that T reasury’s reporting of jobs created or retained by recipients of SSBCI supported loans may potentially duplicate the SBA’s reporting of jobs created or retained by 504/CDC loan program recipients. T reasury agreed to explain clearly in the summary of st ates’ annual reports that there is a possibility for duplicate reporting of job creation and retention figures in such circumstances. See U.S. Department of the T reasury, OIG, State Sm all Business Credit Initiative: Idaho’s Use of Federal Funds for its Collateral Support Program , pp. 5-7, 11, 15. 183 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Indiana’s Use of Federal Funds for Other Credit Support Program s, June 18, 2014, pp. 2, 6-10, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIGSBLF14011.pdf. 184 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Indiana’s Use of Federal Funds for Other Credit Support Program s, p. 6. 185 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Indiana’s Use of Federal Funds for Other Credit Support Program s, p. 6. 186 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Indiana’s Use of Federal Funds for Other Credit Support Program s, p. 1. Congressional Research Service 34 State Small Business Credit Initiative: Implementation and Funding Issues s chief executive officer), although not prohibited, "“may raise the appearance of partiality and should be addressed by SSBCI Policy Guidelines."²²²

Guidelines.”187 The OIG recommended that (1) Treasury recoup the $499,986 of federal funds "intentionally" “intentional y” misused and declare a specific event of default of its allocational ocation agreement with Indiana; (2) determine whether the state'’s funding should be reduced, suspended or terminated as a result of the specific event of default; and (3) require the state to ensure that IEDC reviews each IANF investment decision going forward.²²³

188 Treasury agreed with all al three recommendations but indicated that it "“would not characterize [the $499,986] investment as an 'intentional'‘intentional’ misuse of funds based on the facts set forth in the report" ” because "“intentional misuse requires knowledge that the use of the funds is contrary to the program rules, and action taken must be in a knowing effort to violate those rules."²²⁴

”189 Indiana reported that it had completed an independent audit of the remainder of its SSBCI investments and did not find any other prohibited party transactions or other violations. The state also noted that the board chairman of Elevate Ventures had resigned, effective December 31, 2013; that the $499,986 investment had been repaid with a 15% return on February 6, 2014; and that the investment "“had led to the creation of numerous new jobs for the people of Indiana."²²⁵”190 In addition, Indiana reported that it "will “wil independently review any future potential investment conflict."²²⁶

Tennessee

Treasury' conflict.”191 Tennessee Treasury’s OIG examined a random sample of 20 SSBCI investments made by Tennessee's ’s INCITE Co-Investment Fund, a venture capital program, totaling $13.5 millionmil ion. The sample was drawn from the 43 investments made by the fund between October 4, 2011 (the signing of the state'state’s SSBCI allocational ocation agreement), and September 30, 2013. The OIG also reviewed a sample of the state'’s SSBCI administrative expenses ($483,254 out of $685,880) that had been incurred as of September 30, 2013.²²⁷

192 The OIG found that Tennessee had appropriately used all al $13.5 millionmil ion in SSBCI funds that were reviewed but that "“investor use-of-proceeds assurances were missing for all 20 transactions al 20 transactions 187 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Indiana’s Use of Federal Funds for Other Credit Support Program s, p. 10. T he OIG noted that “ the son is not considered an immediate family member because he does not reside with his father nor is he a minor. T herefore, while the investment constituted a related party transaction, it did not meet the criteria needed to establish it as a prohibited related party interest. T he conflict of interest existing for [the $300,000 investment] ... was disclosed to the Board of Elevate Ventures in accordance with Elevate Venture’s conflict -of-interest policy, and the Board approved the investment without any review by the State.” See U.S. Department of the Treasury, OIG, State Sm all Business Credit Initiative: Indiana’s Use of Federal Funds for Other Credit Support Program s, p. 9. 188 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Indiana’s Use of Federal Funds for Other Credit Support Program s, p. 10. 189 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Indiana’s Use of Federal Funds for Other Credit Support Program s, pp. 10-11, 14. 190 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Indiana’s Use of Federal Funds for Other Credit Support Program s, pp. 16-17. 191 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Indiana’s Use of Federal Funds for Other Credit Support Program s, pp. 16-17. 192 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Tennessee’s Use of Federal Funds for its Venture Capital Program , August 20, 2014, pp. 1-2, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIGSBLF14012.pdf. Congressional Research Service 35 State Small Business Credit Initiative: Implementation and Funding Issues reviewed, and investor sex offender assurances had not been executed prior to the transfer of SSBCI funds for 12 of the transactions."²²⁸”193 As a result, the OIG determined that the state had inaccurately certified that it was in compliance with all al SSBCI requirements in several quarterly reports.

reports. With the OIG'’s consent, Treasury provided Tennessee a draft copy of the OIG'’s findings. Tennessee indicated that it "“was made aware of possible inadequacies in their assurances after attending the SSBCI annual training conference in 2012, and has since corrected their process to ensure that assurances meet program guidelines."” The state claimed that "“its assurances are now 100% complete."²²⁹

”194 The OIG found that all al of Tennessee'’s sampled administrative expenses were reasonable, allowable, and allocable al owable, and al ocable to the program.²³⁰

195 North Dakota Mandan Consortium

Treasury' Treasury’s OIG examined a sample of 15 SSBCI loans made by the Mandan consortium'’s Loan Participation Program, totaling $8.6 million of the $8.9 million mil ion obligated or spent as of March 31, 2014. The sampled loans were made between August 31, 2012 (the signing of the consortium's SSBCI allocation’s SSBCI al ocation agreement), and March 31, 2014. The OIG also reviewed the consortium's ’s $194,101 in SSBCI administrative expenses.²³¹

196 The OIG found that the Mandan consortium used all al of the loan funds it reviewed appropriately. The OIG also determined that the consortium'’s administrative expenses were reasonable, allowable, and allocable al owable, and al ocable to the program.²³²

197 Rhode Island (Slater Technology Fund)

At the request of Treasury SSBCI program officials, the OIG audited Rhode Island'’s Slater Technology Fund. Treasury had informed the OIG that the Slater Technology Fund was potentiallypotential y in noncompliance with SSBCI program rules. A separate audit of Rhode Island's ’s second capital venture program (Betaspring) is underway and will wil be reported at a later date.²³³

198 The OIG examined all al six investments made by the Slater Technology Fund, totaling $1.5 million mil ion in SSBCI funds, made between the signing of the allocational ocation agreement on September 6, 2011, and December 31, 2012. The OIG found that the Slater Technology Fund "“properly used most of the $1.5 million mil ion in SSBCI funds it had expended as of December 31, 2012, but misused $350,000 193 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Tennessee’s Use of Federal Funds for its Venture Capital Program , pp. 3, 5-7. 194 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Tennessee’s Use of Federal Funds for its Venture Capital Program , p. 10. 195 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Tennessee’s Use of Federal Funds for its Venture Capital Program , p. 8. 196 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: North Dakota Mandan Consortium’s Use of Federal Funds for its Loan Participation Program , August 29, 2014, pp. 1-2, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIGSBLF14013R.pdf. 197 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: North Dakota Mandan Consortium’s Use of Federal Funds for its Loan Participation Program , p. 7. 198 U.S. Department of t he T reasury, OIG, State Small Business Credit Initiative: Rhode Island’s Use of Federal Funds for the Slater Technology Fund, October 31, 2014, pp. 1-2, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIGSBLF15001.pdf. Congressional Research Service 36 State Small Business Credit Initiative: Implementation and Funding Issues in SSBCI funds it had expended as of December 31, 2012, but misused $350,000 on two investments by failing to comply with the investor capital-at-risk requirement."²³⁴”199 As the OIG explained, SSBCI'’s guidelines require venture capital funds and angel investor networks receiving SSBCI funds to have a "“meaningful amount"” of their own capital resources at risk. Treasury has determined that this requirement is met when "“private lenders or investors bear 20% or more of the risk of loss in any transaction."²³⁵”200 As the sole investor on the two investments, Rhode Island'’s Slater Technology Fund, which funded the investments in stages, failed to invest any private capital over the course of the entire funding-commitment period for the first investment and did not inject private capital until the date of final payment for the second investment.²³⁶201 The OIG also found that the Slater Technology Fund did not obtain required investee and investor assurances for five of the six investments before the transfer of SSCBI funds.²³⁷

funds.202 Treasury indicated that it would, as the OIG recommended in its audit, provide guidance to SSBCI participants that staged funding of a single investment requires that 20% of the capital-at-risk must be from a private source when SSBCI funds are invested. Rhode Island acknowledged that the private capital was not initially initial y invested as required by Treasury guidelines but indicated that the state "“has implemented measures to ensure future compliance."²³⁸”203 Rhode Island also acknowledged that "“certain investor and investee assurances were not timely obtained by Slater and will and wil now require that such assurances be obtained prior to the release of funds."²³⁹

”204 New York (Canrock Innovate NY Fund, LP)

The OIG audited Canrock Innovate NY Fund, LP, one of eight venture capital firms participating in New York'’s SSBCI venture capital program, calledcal ed the Innovate Fund. The OIG found that the firm'firm’s SSBCI "“investments in four of five beneficiary companies constituted a reckless misuse of approximately $1.63 millionmil ion of SSBCI funds because the investments were prohibited related party interests of its general partner, Canrock Innovate Advisors, LLC."²⁴⁰”205 The OIG noted that " “through a related entity, the three managing members of Canrock Innovate Advisors, LLC had a controlling interest in each of the four beneficiary companies'’ voting shares, which violated the SSBCI Policy Guidelines, regarding conflicts of interest."²⁴¹

”206 The OIG recommended that Treasury recoup the $1.63 millionmil ion. Treasury indicated that in lieu of recoupment, it would not disburse the remainder of New York'’s SSBCI allocational ocation. Treasury had 199 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Rhode Island’s Use of Federal Funds for the Slater Technology Fund, p. 2. 200 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Rhode Island’s Use of Federal Funds for the Slater Technology Fund, p. 2. 201 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Rhode Island’s Use of Federal Funds for the Slater Technology Fund, p. 2. 202 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Rhode Island’s Use of Federal Funds for the Slater Technology Fund, p. 3. 203 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Rhode Island’s Use of Federal Funds for the Slater Technology Fund, p. 4. 204 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: Rhode Island’s Use of Federal Funds for the Slater Technology Fund, p. 4. 205 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: New York’s Use of Federal Funds for Other Credit Support Program s, January 24, 2017, p. 2, at https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_T estimonies/OIG-17-035.pdf. 206 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: New York’s Use of Federal Funds for Other Credit Support Program s, p. 2. Congressional Research Service 37 State Small Business Credit Initiative: Implementation and Funding Issues . Treasury had withheld the amount in question from New York'’s final disbursement pending the results of the OIG'OIG’s audit. The OIG responded to Treasury'’s action by indicating that the withholding of the funds met the intent of its recommendation.²⁴²

Concluding Observations

The207 Concluding Observations The original SSBCI was enacted as part of a larger effort to enhance the supply of capital to small smal businesses. Advocates argued that the SSBCI would help to address the then-recent decline in small smal business lending and create jobs. Opponents were not convinced it would enhance small smal business lending and worried about the program'’s potential cost to the federal treasury.

It is difficult to determine the full extent of the program'’s effect on small smal business lending. As mentioned earlier mentioned, as of December 31, 2016, states had spent or obligated about 88% of the $1.45 billion available ($1.27 billion of $1.45 billionbil ion available ($1.27 bil ion of $1.45 bil ion), which is sufficient to provide some insight. For example, as mentioned earlier, Treasury has reported that SSBCI funds supported more than 21,000 loans and investments in small smal business amounting to over $10.7 billionbil ion, with more than 80% of the funds and investments made to small smal businesses with 10 or fewer full-time employees. Treasury has also reported that small smal businesses indicated that SSBCI funds helped them to create or retain 240,669 jobs (79,193 new jobs and 161,476 retained jobs).²⁴³208 But, as Treasury has also noted, determining the SSBCI'’s influence on small smal business lending is likely to be more suggestive than definitive because differentiating the SSBCI'’s effect on small smal business lending from other, exogenous factors, such as changes in the lender'’s local economy and changes in the demand for small smal business loans, is methodologically challenging, especiallymethodological y chal enging, especial y given the relatively small smal amount of financing involved relative to the national market for small smal business loans.209 As mentioned previously, the SSBCI's $1.5 billion in financing represents’s $1.5 bil ion in financing at that time represented about 0.24% of outstanding non-agricultural small smal business loans.

Treasury's OIG' Treasury’s OIG’s audits of 24 states'’ implementation of their SSBCI programs suggest that many states experienced difficulty reaching full compliance with the program'’s administrative requirements, which were designed to reduce the likelihood of loan defaults, investment losses, and fraudulent use of funds. That should no longer be an issue because states now have experience with, and are accustomed to, the SSBCI’and fraudulent use of funds. The release of Treasury's "SSBCI National Standards for Compliance and Oversight" document on May 15, 2012, proved useful because it helped states become more familiar with, and accustomed to, the SSBCI's rules and regulations.²⁴⁴s rules and regulations. However, given the relatively large number of new small increase in proposed funding, the large number of smal business investment programs receiving SSBCI funding, the relativelyand the large number of entities involved in the program (state officials, hundreds of lenders and investment companies, and thousands of smal businesses), SSBCI program oversight is likely to remain a congressional interest. 207 U.S. Department of the T reasury, OIG, State Small Business Credit Initiative: New York’s Use of Federal Funds for Other Credit Support Program s, pp. 6, 7. 208 U.S. Department of the T reasury, State Small Business Credit Initiative: A Summary of States’ 2016 Annual Reports, pp. 3, 15, at https://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI%20Summary%20of%20States%20Annual%20Report%202016_508%20Compliant.pdf . 209 U.S. T reasury, “Correspondence with the author,” June 22, 2012. Congressional Research Service 38 State Small Business Credit Initiative: Implementation and Funding Issues Appendix. The Original SSBCI’s Legislative Origins On January 27, 2010, then-President Obama announced in his State of the Union Address that because “financing remains difficult for smal business owners across the country, even those that are making a profit,” he would send Congress several legislative proposals designed to enhance smal business access to capital, including a proposal to establish a $30 bil ion Smal Business Lending Fund (SBLF).210 On May 7, 2010, the Obama Administration sent Congress draft legislation to establish the SBLF and the State Smal Business Credit Initiative (SSBCI).211 On May 13, 2010, Representative (now Senator) Gary Peters introduced H.R. 5302, the State Smal Business Credit Initiative Act of 2010. The bil would have authorized a $2 bil ion SSBCI modeled on the President’s SSBCI proposal. That same day, then-Representative Barney Frank, then-chair of the House Committee on Financial Services, introduced H.R. 5297, initial y titled the Smal Business Lending Fund Act of 2010. Based on the President’s SBLF proposal, the bil was designed to encourage lending to smal businesses by creating a $30 bil ion SBLF to make capital investments in eligible community banks with total assets of less than $10 bil ion.212 On May 18, 2010, the Committee on Financial Services held a hearing on H.R. 5297 and the following day, approved the bil , 42-23, as amended.213 Perhaps the most significant amendment approved was an amended version of the $2 bil ion State Smal Business Credit Initiative Act of 2010. It was approved by a vote of 39-23.214 SBLF and SSBCI advocates argued that the programs were necessary because “many companies, particularly smal businesses, claim that it is becoming harder to get new loans to keep their business operating and that banks are tightening requirements or cutting off existing lines of even when the businesses are up to date on their loan repayments.”215 In their view, the SBLF and SSBCI would promote economic growth and job creation by enhancing smal business access to capital. The House Committee on Financial Services’ Republicans indicated in the report accompanying H.R. 5297 that they “were unanimous in our opposition to this misguided legislation.”216 They 210 U.S. President (Barack Obama), “ Remarks by the President in State of the Union Address,” January 27, 2010, at https://obamawhitehouse.archives.gov/the-press-office/remarks-president -state-union-address. 211 U.S. Congress, House Committee on Financial Services, To Create the Small Business Lending Fund Program to Direct the Secretary of the Treasury to m ake Capital Investm ents(state officials, hundreds of lenders and investment companies, and thousands of small businesses), and the termination of Treasury's role in SSBCI administration, SSBCI program oversight is likely to remain a congressional interest.