State Small Business Credit Initiative:
Implementation and Funding Issues
Robert Jay Dilger
Senior Specialist in American National Government
October 16, 2014
Congressional Research Service
7-5700
www.crs.gov
R42581
State Small Business Credit Initiative: Implementation and Funding Issues
Summary
Congressional interest in small business access to capital has increased in recent years because of
concerns that small businesses might be prevented from accessing sufficient capital to enable
them to create and retain jobs and assist in the economic recovery. Some, including President
Obama, have argued that the federal government should provide additional resources to assist
small businesses in acquiring capital necessary to start, continue, or expand operations and create
jobs. Others worry about the long-term adverse economic effects of spending programs that
increase the federal deficit. They advocate business tax reduction, reform of financial credit
market regulation, and federal fiscal restraint as the best means to assist small businesses and
create jobs.
During the 111th Congress, P.L. 111-240, the Small Business Jobs Act of 2010, provided the Small
Business Administration (SBA) additional funding and enhanced several SBA lending programs
in an effort to assist small businesses access capital. The act also authorized the Secretary of the
Treasury to establish a $1.5 billion State Small Business Credit Initiative (SSBCI).
The SSBCI provides 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 June 30, 2014, 47 states
had received at least two tranches and 20 had received their third and final tranche. The remaining
states are expected to receive their third and final tranche during FY2015.
SSBCI participants are expected to leverage their SSBCI funds to generate new small business
lending that is at least 10 times the amount of their 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 currently participate in the program.
The Obama Administration has recommended that another $1.5 billion round of funding take
place, with applications accepted in FY2015 and state allotments provided in one-half increments
starting in FY2015 and continuing through FY2018. The Administration has proposed that $1
billion be 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 Administration’s proposal has been introduced in both the House and the
Senate (H.R. 4556 and S. 2285).
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 are
generally complying with the statute’s requirements, but that some compliance problems exist;
Treasury’s oversight of the program could be improved; and performance measures are needed to
assess the program’s efficacy.
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State Small Business Credit Initiative: Implementation and Funding Issues
Contents
Overview .......................................................................................................................................... 1
Legislative Origins ........................................................................................................................... 3
SSBCI Programs .............................................................................................................................. 6
State Capital Access Programs .................................................................................................. 6
State Loan Participation Programs ............................................................................................ 7
State Loan Guarantee Programs ................................................................................................ 8
State Collateral Support Programs ............................................................................................ 8
State Venture Capital Programs ................................................................................................. 9
SSBCI Funding ................................................................................................................................ 9
Application Process ................................................................................................................. 10
The Funding Formula .............................................................................................................. 11
State-by-State Allotments ........................................................................................................ 11
Audits, Evaluation Reports, and Program Adjustments ................................................................. 14
GAO’s 2011 Audit ................................................................................................................... 15
Treasury’s Response to GAO’s 2011 Audit: Performance Measures ................................ 16
GAO’s 2012 Audit ................................................................................................................... 17
Treasury’s Response to GAO’s 2012 Audit: Written Policy Guidance and
Publishing Performance Measures ................................................................................. 18
GAO’s 2013 Audit ................................................................................................................... 19
Treasury’s Response to GAO’s 2013 Audit: Targets for Program Performance
Measures and Outreach .................................................................................................. 20
Treasury’s Inspector General Evaluation Reports ................................................................... 21
Treasury’s Inspector General Use of SSBCI Funds Audit Reports ......................................... 22
California ........................................................................................................................... 22
Montana ............................................................................................................................. 23
Vermont ............................................................................................................................. 24
Michigan ........................................................................................................................... 25
Texas.................................................................................................................................. 25
Massachusetts .................................................................................................................... 25
Delaware ........................................................................................................................... 27
New Jersey ........................................................................................................................ 27
Alabama ............................................................................................................................ 28
Missouri ............................................................................................................................. 28
Washington ........................................................................................................................ 29
Kansas ............................................................................................................................... 30
Florida ............................................................................................................................... 31
Louisiana ........................................................................................................................... 32
West Virginia ..................................................................................................................... 33
Illinois ............................................................................................................................... 33
South Carolina ................................................................................................................... 34
American Samoa ............................................................................................................... 35
North Carolina ................................................................................................................... 36
Idaho .................................................................................................................................. 37
Indiana ............................................................................................................................... 38
Tennessee .......................................................................................................................... 39
North Dakota Mandan Consortium ................................................................................... 40
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Concluding Observations ............................................................................................................... 40
Tables
Table 1. SSBCI Programs .............................................................................................................. 12
Contacts
Author Contact Information........................................................................................................... 41
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State Small Business Credit Initiative: Implementation and Funding Issues
Overview
Congressional interest in small business access to capital has increased in recent years because of
concerns that small businesses might be prevented from accessing sufficient capital to enable
them to assist in the economic recovery. Some, including President Obama, have argued that the
federal government should provide additional resources to assist small businesses in acquiring
capital necessary to start, continue, or expand operations and create jobs. They argue that in
recent years many financial institutions have tightened their small business lending standards in
reaction to higher loan default rates and higher percentages of loans in arrears resulting largely
from relatively weak economic conditions throughout the nation. They also assert that the federal
government should intervene because it is relatively difficult for many small businesses,
including some with excellent credit histories, to access the capital they need to expand their
operations.1
Others worry about the long-term adverse economic effects of spending programs that increase
the federal deficit. They advocate business tax reduction, reform of financial credit market
regulation, and federal fiscal restraint as the best means to assist small businesses and create
jobs.2
During the 111th 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 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).4
The SSBCI provides funding, allocated through a statutorily created formula and distributed in
one-third increments (called tranches), to states, the District of Columbia, eligible territories, and
eligible municipalities (hereinafter states) to expand existing or create new state small 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 SSBCI
funds transferred to states.5 At that time, Treasury anticipated providing another $859 million in
1 The White House, “American Jobs Act,” at http://www.whitehouse.gov/economy/jobsact; and The White House,
“Startup America Initiative,” at http://www.whitehouse.gov/economy/business/startup-america.
2 U.S. Congress, House Committee on Financial Services, To Create the Small Business Lending Fund Program to
Direct the Secretary of the Treasury 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; and National Federation of Independent
Businesses, “Issues: The Economy,” Washington, DC, at http://www.nfib.com/advocacy/economy.
3 For further information and analysis concerning the Small Business Jobs Act of 2010, see CRS Report R41385, Small
Business Legislation During the 111th Congress, by Robert Jay Dilger and Gary Guenther; and CRS Report R40985,
Small Business: Access to Capital and Job Creation, by Robert Jay Dilger.
4 For further information and analysis concerning the Small Business Lending Fund, see CRS Report R42045, The
Small Business Lending Fund, by Robert Jay Dilger.
5 U.S. Office of Management and Budget, “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.
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SSBCI funds to states in FY2012.6 However, because it took states longer than anticipated to
expend, transfer, or obligate their first tranche of SSBCI funds, Treasury transferred less SSBCI
funds to states in FY2012 than in FY2011 ($187 million, for a total of $553 million).7 In FY2013,
Treasury transferred $364 million in SSBCI funds to states (totaling $917 million).8
As of June 30, 2014, Treasury had disbursed $1.07 billion, or about 74%, of the $1.45 billion
available to states ($1.5 billion minus Treasury’s administrative costs).9 As of June 30, 2014, all
57 participants had received their first tranche, 47 had received their second tranche, and 20 had
received their third tranche.10 Treasury anticipates that most states will have received their third,
and final, tranche by the end of FY2015, depending on how quickly they expend, transfer, or
obligate their SSBCI funds.
States are expected to leverage their SSBCI funds to generate new small business lending that is
at least 10 times the amount of their SSBCI funds (a leverage ratio of 10:1). There are 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 will promote
economic growth and job creation by enhancing small business access to capital. Opponents
argued that the SBLF and SSBCI did not address the need to stimulate demand for credit by small
businesses, which, in their view, is the core issue affecting the role of small business in job
creation during the economic recovery. They argued that “the solutions to America’s economic
problems do not lie in more taxpayer-funded bailouts,” and advocated small business tax
reductions as a more effective means to stimulate job creation and economic growth.11 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 Robert
Jay Dilger and CRS Report R42045, The Small Business Lending Fund, by Robert Jay Dilger.
It is still too early to determine the full extent of the SSBCI’s effect on small business lending. As
of June 30, 2014, states had spent or obligated just over half of the program’s funds (about $891.3
million, or 61%).12 Also, determining the program’s influence on small business lending is likely
6 Ibid.
7 U.S. Office of Management and Budget, “Appendix, Budget of the U.S. Government, FY2014: Department of the
Treasury,” p. 991, at http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/tre.pdf.
8 U.S. Department of the Treasury, “State Small Business Credit Initiative, FY 2015: President’s Budget,” p. 6, at
http://www.treasury.gov/about/budget-performance/CJ15/21.%20SSBCI.pdf.
9 U.S. Department of the Treasury, “State Small Business Credit Initiative: A Summary of States’ Quarterly Reports as
of June 30, 2014,” p. 2, at http://www.treasury.gov/resource-center/sb-programs/Documents/
SSBCI%20Quarterly%20Report%20Summary%20June%202014v%20FINAL%20v2.pdf.
10 Ibid.
11 U.S. Congress, House Committee on Financial Services, To Create the Small Business Lending Fund Program to
Direct the Secretary of the Treasury 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.
12 U.S. Department of the Treasury, “State Small Business Credit Initiative: A Summary of States’ Quarterly Reports as
of June 30, 2014,” p. 2, at http://www.treasury.gov/resource-center/sb-programs/Documents/
SSBCI%20Quarterly%20Report%20Summary%20June%202014v%20FINAL%20v2.pdf. In addition, as of June 30,
2014, 12 states reported that they had spent about $32.1 million for new SSBCI supported loans and investments using
recycled SSBCI funds generated from SSBCI loan repayments and returns on SSBCI investments.
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to be more suggestive than definitive because differentiating the SSBCI’s effect on small business
lending from other factors, such as changes in the lender’s local economy, is methodologically
challenging, especially given the relatively small amount of financing involved relative to the
national market for small business loans. The SSBCI’s $1.5 billion in financing represents about
0.25% of outstanding non-agricultural small business loans.13
The Obama Administration has argued that SSBCI funds have provided “new loans and
investments to more than 8,500 businesses” and “business owners report more than 95,000 jobs
will be created or retained due to the new loans and investments caused by SSBCI funds.”14 The
Administration has announced that “due to the success of the first round of SSBCI, the
President’s [FY2015] budget proposes a second round of $1.5 billion for a program to run from
2015 through 2021.”15
Under the Administration’s proposal, applications for the second round of funding would be
accepted in FY2015, with state allotments provided in one-half increments starting in FY2015
and continuing through FY2018.16 The Administration has proposed that $1 billion be
competitively awarded to states “best able to target underserved groups, leverage federal funding,
and evaluate results” and $500 million awarded “by a need-based formula based on economic
factors such as job losses and pace of economic recovery.”17
H.R. 4556, the Small Business Access to Capital Act of 2014, and S. 2285, its companion bill in
the Senate, both introduced on May 1, 2014, and referred to their respective chamber’s
Committees on Small Business, include provisions similar to the Administration’s proposal.
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 audits suggest that states are generally complying with
the statute’s requirements, but that some compliance problems exist; Treasury’s oversight of the
program could be improved; and performance measures are needed to assess the program’s
efficacy.
Legislative Origins
On January 27, 2010, President Obama announced in his State of the Union Address that because
“financing remains difficult for small business owners across the country, even those that are
making a profit,” he would send Congress several legislative proposals designed to enhance small
13 Federal Deposit Insurance Corporation, “Statistics on Depository Institutions,” at http://www2.fdic.gov/SDI/
main.asp. As of June 30, 2014, there was $589,745,258,000 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”).
14 U.S. Department of the Treasury, “State Small Business Credit Initiative: A Summary of States’ 2013 Annual
Reports,” p. iii, at http://www.treasury.gov/resource-center/sb-programs/Documents/
SSBCI%20Summary%20of%20States%20Annual%20Reports%202013.pdf.
15 U.S. Department of the Treasury, “State Small Business Credit Initiative, FY 2015: President’s Budget,” p. 3, at
http://www.treasury.gov/about/budget-performance/CJ15/21.%20SSBCI.pdf.
16 Ibid., p. 6.
17 Ibid., p. 4.
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business access to capital, including a proposal to establish a $30 billion SBLF.18 On May 7,
2010, the Obama Administration sent Congress draft legislation to establish the SBLF and the
SSBCI.19
On May 13, 2010, Representative Gary Peters introduced H.R. 5302, the State Small Business
Credit Initiative Act of 2010. The bill would have authorized a $2 billion SSBCI modeled on the
President’s SSBCI proposal. That same day, Representative Barney Frank, chair of the House
Committee on Financial Services, introduced H.R. 5297, initially titled the Small Business
Lending Fund Act of 2010. Based on the President’s SBLF proposal, the bill was designed to
encourage lending to small businesses by creating a $30 billion SBLF to make capital
investments in eligible community banks with total assets of less than $10 billion.20 On May 18,
2010, the Committee on Financial Services held a hearing on H.R. 5297 and, the following day,
approved the bill, 42-23, as amended.21 Perhaps the most significant amendment approved was an
amended version of the $2 billion State Small Business Credit Initiative Act of 2010. It was
approved by a vote of 39-23.22
SBLF and SSBCI advocates argued that the programs were necessary because “many companies,
particularly small 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
credit even when the businesses are up to date on their loan repayments.”23 In their view, the
SBLF and SSBCI would promote economic growth and job creation by enhancing small 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.”24 They
argued that the SBLF and SSBCI did not address what they considered to be the core issue
affecting small business job creation during the economic recovery—the need to stimulate
demand for credit by small businesses.25 They argued that the bill would fail to help small
businesses or create jobs, would succeed only in adding billions of dollars to the nation debt, and
concluded that “the solutions to America’s economic problems do not lie in more taxpayer-funded
18 The White House, “Remarks by the President in State of the Union Address,” at http://www.whitehouse.gov/the-
press-office/remarks-president-state-union-address.
19 U.S. Congress, House Committee on Financial Services, To Create the Small Business Lending Fund Program to
Direct the Secretary of the Treasury 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), p. 17.
20 U.S. Congress, House Committee on Financial Services, To Create the Small Business Lending Fund Program to
Direct the Secretary of the Treasury 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), p. 18.
21 U.S. Congress, House Committee on Financial Services, Incentives to Promote Small Business Lending, Jobs, and
Economic Growth, 111th Cong., 2nd sess., May 18, 2010, Serial No. 111-137 (Washington: GPO, 2010).
22 U.S. Congress, House Committee on Financial Services, To Create the Small Business Lending Fund Program to
Direct the Secretary of the Treasury 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. 21, 22.
23 Ibid., p. 16.
24 Ibid., p. 18.
25 Ibid., p. 37.
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bailouts.”26 Instead of supporting federal spending programs to enhance small business access to
capital, they advocated an extension of a series of small business tax credits as a more effective
means to stimulate small business job creation and economic growth.27
On June 14, 2010, the House Committee on Rules issued a rule for H.R. 5297 (H.Res. 1436),
which provided that “in the engrossment of H.R. 5297, the Clerk shall add the text of H.R. 5486,
as passed by the House, at the end of H.R. 5297 and that H.R. 5486 shall be laid on the table.”28
H.R. 5486, To Amend the Internal Revenue Code of 1986 to Provide Tax Incentives for Small
Business Job Creation, and for Other Purposes, included several tax incentives for small
businesses and several revenue raising provisions designed to offset the costs of the tax
incentives. Also, at that time, the House Committee on Rules posted on its website legislative
language for a proposed amendment in the nature of a substitute to H.R. 5297, as reported, which
included a proposed $1 billion Small Business Early-Stage Investment Program.
On June 17, 2010, the House passed H.R. 5297, by a vote of 241-182. The engrossed bill, retitled
the Small Business Jobs and Credit Act of 2010, also included the language in H.R. 5486 and the
Small Business Early-Stage Investment Program, as well as the $30 billion SBLF and $2 billion
SSBCI.
The arguments presented in the House report accompanying the bill, both for and against the
bill’s passage, were also presented during House floor debate. For example, advocates argued that
the SSBCI would “increase small business lending which will retain and create jobs.”29
Opponents argued that the bill “is repeating the same failed initiatives that have helped our
national debt grow to $13 billion in the past two years” and did not address what they viewed as
the top problem facing small businesses—“the lack of sales and demand.”30
The House-passed version of H.R. 5297 was placed on the Senate Legislative Calendar on June
18, 2010. Following a series of votes on motions to invoke cloture on several amendments in the
nature of a substitute to H.R. 5297, and the August recess, the Senate passed an amended version
of the bill (S.Amdt. 4594, an amendment in the nature of a substitute for H.R. 5297) on
September 16, 2010, by a vote of 61-38.31 The Senate-passed version of the bill, which included
26 Ibid., p. 38.
27 Ibid.
28 H.Res. 1436. A second rule (H.Res. 1448) was issued on June 16, 2010, to allow consideration of two amendments
that were revised to comply with House “pay-go” rules.
29 Representative Melissa Bean, “The Small Business Jobs and Credit Act of 2010,” House debate, Congressional
Record, vol. 156, no. 90 (June 16, 2010), p. H4514.
30 Representative Randy Neugebauer, “The Small Business Jobs and Credit Act of 2010,” House debate, Congressional
Record, vol. 156, no. 90 (June 16, 2010), p. H4514, H4515.
31 On June 29, 2010, cloture on a motion to proceed to H.R. 5297 was invoked in the Senate, by a vote of 66-33. That
same day, Senator Harry Reid proposed a motion to commit H.R. 5297 to the Senate Committee on Finance with
instructions to report back forthwith S.Amdt. 4407, an amendment in the nature of a substitute, which included the
Small Business Lending Fund (SBLF) and most of the provisions later included in S.Amdt. 4594. In response to
perceived opposition to the SBLF, S.Amdt. 4407 was withdrawn on July 21, 2010. In its place, Senator Harry Reid
proposed for Senator George LeMieux S.Amdt. 4500, to establish the Small Business Lending Fund Program. He also
proposed for Senator Max Baucus S.Amdt. 4499, an amendment in the nature of a substitute, which contained S.Amdt.
4407, with modifications, minus the SBLF. On July 22, 2010, cloture on S.Amdt. 4500 was invoked in the Senate, by a
vote of 60-37. On July 27, 2010, Senator Harry Reid withdrew S.Amdt. 4500 and introduced for Senator Max Baucus
S.Amdt. 4519, which included the SBLF, the provisions in S.Amdt. 4499, with modifications, $1.5 billion in
emergency disaster agricultural assistance, and additional revenue off-sets. On July 29, 2010, a motion to invoke
cloture on S.Amdt. 4519 failed, by a vote of 58-42. Debate on the motion focused on differences concerning the SBLF
(continued...)
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the SSBCI but funded at $1.5 billion instead of $2 billion, was passed by the House on September
23, 2010, by a vote of 237-187. The enrolled bill, retitled the Small Business Jobs Act of 2010,
was signed into law (P.L. 111-240) by President Obama on September 27, 2010.32
The arguments presented during Senate floor debate, both for and against the bill’s passage, were
similar to those presented during House floor debate. One difference was a greater emphasis by
the bill’s advocates in the Senate on the SSBCI’s support of state loan collateral programs.
Several Senators argued that the SSBCI’s support of state loan collateral programs was needed
because, as one Senator pointed out “just as the recession has battered the value of our homes, it
has also battered the value of business property such as real estate, factories, and equipment. That
has damaged the ability of small businesses to get bank financing because it has lowered the
value of property they can offer as collateral.”33
SSBCI Programs
The SSBCI provides funding to expand existing or create new state small business investment
programs, including capital access programs, loan participation programs, loan guarantee
programs, collateral support programs, venture capital programs, and any other small business
credit or equity support program that meets the SSBCI’s program requirements.
State Capital Access Programs
State capital access (CAP) programs are loan portfolio insurance programs that enable “small
businesses to obtain credit to help them grow and expand their business.”34 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
(...continued)
and the number of amendments to be offered. On August 5, 2010, Senator Harry Reid introduced for Senators Max
Baucus and Mary Landrieu S.Amdt. 4594, an amendment in the nature of a substitute. It contained the provisions in
S.Amdt. 4519 except that it removed a provision to eliminate the advance payment option for the earned-income tax
credit that would have raised $1.1 billion, removed a provision that would have reallocated $500 million in future
spending from P.L. 111-5, the American Recovery and Reinvestment Act of 2009, and removed a provision to provide
$1.5 billion in emergency agricultural assistance funding. On September 14, 2010, the Senate invoked cloture on
S.Amdt. 4594, by a vote of 61-37, and passed it on September 16, 2010, by a vote of 61-38. See Senator Harry Reid,
“Text of Amendments: SA 4519,” Congressional Record, vol. 156, no. 111 (July 27, 2010), pp. S6309-S6337; Senator
Kay Hagan, “Motion to Invoke Cloture on amendment No. 4519,” Roll Call Vote No. 221 Leg., Congressional Record,
vol. 156, no. 113 (July 29, 2010), p. S6473; Senator Harry Reid, “Small Business Lending Fund Act of 2010,” Remarks
in the Senate, Congressional Record, vol. 156, no. 113 (July 29, 2010), pp. S6472, S6473; Senator Mitch McConnell,
“Small Business Lending Fund Act of 2010,” Remarks in the Senate, Congressional Record, vol. 156, no. 113 (July 29,
2010), pp. S6472, S6473; Senator Kay Hagen, “Motion to Invoke Cloture on H.R. 5297, the Small Business Lending
Fund Act of 2010,” Rollcall Vote No. 236 Leg., Congressional Record, daily edition, vol. 156, part 125 (September 16,
2010), p. S7158; and Senator Al Franken, “Small Business Lending Fund Act of 2010,” Rollcall Vote No. 237 Leg.,
Congressional Record, daily edition, vol. 156, part 125 (September 16, 2010), p. S7158.
32 Senator Al Franken, “Small Business Lending Fund Act of 2010,” Rollcall Vote No. 237 Leg., Congressional
Record, daily edition, vol. 156, part 125 (September 16, 2010), p. S7158.
33 Senator Carl Levin, “Small Business Lending Fund Act of 2010,” remarks in the Senate, Congressional Record, vol.
156, part 124 (September 15, 2010), p. S7123.
34 U.S. Department of the Treasury, “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.
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contribution 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 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
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 it chooses to do so.36
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 In addition,
the borrower must have 500 employees or less at the time that the loan is enrolled in the program
and the loan amount may not exceed $5 million.38
State Loan Participation Programs
State loan participation programs enable “small businesses to obtain medium to long-term
financing, usually in the form of term loans.”39 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 which a lender originates a senior loan and the state
originates a second loan, which is usually subordinate to the lender’s senior loan should a default
occur, to the same borrower. State loan participation programs encourage lending to small
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
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
35 Ibid.
36 Ibid.
37 Ibid. State CAPs under the SSBCI program may not enroll the unguaranteed portions of SBA guaranteed or other
federally guaranteed loans without the express, prior written consent of Treasury. Also, restrictions apply to refinancing
and other uses.
38 Ibid.
39 U.S. Department of the Treasury, “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.
40 Ibid.
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of 500 employees or less, and may not extend credit to borrowers with more than 750 employees.
They must also target an average loan amount of $5 million or less, and may not extend credit for
any single loan exceeding $20 million.41
State Loan Guarantee Programs
State loan guarantee programs enable “small 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 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 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 typically 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, collateral, and other loan terms are typically
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 discuss and negotiate loan terms and
guarantee options prior to reaching agreement to approve the loan and issue a guarantee.43
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 less, and may not guarantee credit to borrowers with more
than 750 employees. They must also target an average loan amount of $5 million or less, and may
not guarantee credit for any single loan exceeding $20 million.44
State Collateral Support Programs
State collateral support programs are “designed to enable financing that might otherwise be
unavailable due to a collateral shortfall.”45 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
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 less, and may not support credit to borrowers with more than
41 Ibid.
42 U.S. Department of the Treasury, “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.
43 Ibid.
44 Ibid.
45 U.S. Department of the Treasury, “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.
46 Ibid.
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750 employees. They must also target an average loan amount of $5 million or less, and may not
support credit for any single loan exceeding $20 million.47
State Venture Capital Programs
State venture capital programs provide “investment capital to create and grow start-up and early-
stage businesses.”48 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.49 In both cases, the day-to-day
management of the fund is typically outsourced to a professional firm. Investments are typically
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 typically for 3 years to
7 years.50
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 its
investments to businesses that have 500 employees or less, and may not invest in businesses with
more than 750 employees. They must also target an average investment of $5 million or less, and
may not make a single investment exceeding $20 million.51
SSBCI Funding
P.L. 111-240 appropriated $1.5 billion to the Department of the Treasury for the SSBCI program,
including the “reasonable costs of administering the program.”52 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 are eligible for funding, with the amount available
to each state, territory, and municipality determined by a formula contained in the act (described
later in this section).
47 Ibid.
48 U.S. Department of the Treasury, “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.
49 Ibid.
50 Ibid.
51 Ibid.
52 12 U.S.C. §5708(b). Treasury reports that SSBCI administrative expenses, which include the cost of government
employee salaries, contract support, and reimbursement to the Treasury Office of the Inspector General for program
audits, were $5,393,000 in FY2011, $4,746,000 in FY2012, and $6,431,000 in FY2013; and is estimated to be
$8,299,000 in FY2014. See U.S. Department of the Treasury, “State Small Business Credit Initiative: FY2013
President’s Budget Submission,” 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 Small 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 Treasury, “State Small Business Credit
Initiative: FY2015 President’s Budget,” pp. 3, 9, athttp://www.treasury.gov/about/budget-performance/CJ15/
21.%20SSBCI.pdf.
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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
apply for funding, they were required to submit to Treasury an application for funding by June 27,
2011.
Municipalities were allowed to apply for funding, but 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’s SSBCI allotment, with the final approved amounts apportioned based on
their proportionate share of the population of all approved municipal applicants in that state,
based on the most recent available decennial census.53 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 business support program);
• confirmation that at a minimum, $1 of public investment will result in at least $1
of new private credit; that there is a reasonable expectation that the funding will
result in new small business lending of at least 10 times the amount of the SSBCI
federal contribution; that the funding targets small businesses with 500
employees or less, does not support borrowers that have more than 750
employees, targets loans with an average principal of $5 million or less, and does
not extend credit support to loans that exceed $20 million;
• documentation describing the operational capacity, skills, and experience of the
applicant’s management team in operating capital access and other small 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
provide access to capital for small 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
53 12 U.S.C. §5703(d)(6). If more than three municipalities or combinations of municipalities from the same state are
approved, Treasury 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).
54 U.S. Department of the Treasury, “State Small Business Credit Initiative: Application,” at http://www.treasury.gov/
resource-center/sb-programs/Documents/SSBCI%20Application.pdf.
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The Funding Formula
The SSBCI funding formula takes into account the number of jobs and job losses for each state in
proportion to the aggregate number of jobs and job losses nationally. Specifically, it is 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 unemployed in each state in December 2009 compared with the number of individuals
unemployed nationally in December 2009. After accounting for Treasury’s anticipated
administrative costs, each participating state is guaranteed a minimum allotment of 0.9% of
available funding ($13,168,350).55
Funding is provided in three installments (called tranches), each approximately one-third of the
participant’s approved allotment. The first tranche is provided “immediately following the receipt
of the fully signed Allocation Agreement.”56 Allotment agreements describe how states are to
comply with program requirements and are signed after the state’s application is approved.
Prior to the receipt of the second and third tranches, each state must certify that it has expended,
transferred, or obligated at least 80% of the previous disbursement to, or for the account of, one
or more approved state programs.57 Treasury is authorized to recoup misused funds should the
state be found in default of the allocation agreement and may terminate any portion of an
allotment that Treasury has not disbursed within two years of the date on which the allocation
agreement with the state was signed. By statute, all SSBCI allocation agreements expire on
March 31, 2017.
State-by-State Allotments
By the June 27, 2011, deadline, 48 states, American Samoa, the District of Columbia, Guam,
Puerto Rico, the Northern Marianas Islands, and the U.S. Virgin Islands had submitted an
application to participate in the program. Collectively, they requested approximately $1.4 billion
in funding.58 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 million in SSBCI funding.59 Funding was allotted to Anchorage, Alaska
($13,168,350); a Laramie, Wyoming, led consortium of 17 municipalities ($13,168,350); a
Mandan, North Dakota, led consortium of 37 municipalities and an Indian tribe ($9,710,768); and
a Carrington, North Dakota, led consortium of 36 municipalities ($3,457,582).
Table 1 shows the amount of SSBCI funding awarded to each state and territory (hereinafter
referred to as states unless otherwise noted), and the types of small business investment programs
55 Treasury anticipates that its total administrative costs over the lifetime of the SSBCI program will be about $36.85
million.
56 U.S. Department of the Treasury, “State Small Business Credit Initiative: Frequently Asked Questions,” at
http://www.treasury.gov/resource-center/sb-programs/Pages/ssbci-faqs.aspx#gen3.
57 Ibid.
58 Applicants were entitled to the funding provided by the SSBCI formula. American Samoa requested $10,418,500.
The minimum SSBCI allotment is $13,168,350. All other applicants requested the amount provided by the SSBCI
formula. See U.S. Government Accountability Office, State Small Business Credit Initiative, GAO-12-173, December
7, 2011, p. 9, at http://www.gao.gov/assets/590/586727.pdf.
59 Ibid.
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supported. As shown on Table 1, California received the largest allotment ($167.75 million) and
American Samoa, which requested less than the minimum guaranteed allotment, received the
smallest allotment ($10.5 million).
States use SSBCI funding to support small business investment programs: 24 support a capital
access program, 37 support a loan participation program, 18 support a loan guarantee program, 17
support a collateral support program, and 35 support a venture capital program.
Table 1. SSBCI Programs
Capital
Allotment
Access
Loan
Loan
Collateral Venture
Participant
($ millions) Program Participation Guarantee
Support
Capital
Alabama $31.301
X X X
Alaska,
$13.168
X
Anchorage
American Samoa
$10.500
X
Arizona $18.204
X
Arkansas $13.168
X X X X
California $167.755
X X X X
Colorado $17.233
X
X
Connecticut $13.301 X
Delaware $13.168
X X
District of
$13.168
X
Columbia
Florida $97.622
X
X X
X
Georgia $47.808
X X X
Guam $13.168
X
X
X
Hawaii $13.168
X
Idaho $13.168
X
Illinois $78.365
X
X
X
X
Indiana $34.339
X
X
Iowa $13.168
X
X
X
Kansas $13.168
X
X
Kentucky $15.487
X X X
Louisiana $13.168
X X
Maine $13.168
X
X
Maryland $23.025
X X X
Massachusetts $22.023 X
X
Michigan $79.157
X X X
X
Minnesota $15.463
X X X X
Mississippi $13.168
X
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Capital
Allotment
Access
Loan
Loan
Collateral Venture
Participant
($ millions) Program Participation Guarantee
Support
Capital
Missouri $26.930
X
X
Montana $13.168
X
Nebraska $13.168
X X
Nevada $13.803
X X
X
New Hampshire
$13.168
X
X
X
X
X
New Jersey
$33.760
X
X
X
New Mexico
$13.168
X
New York
$55.351
X
X
X
North Carolina
$46.061
X
X
X
North Dakota,
$13.168
Xa X
X
Mandan &
Carrington
consortiums
Northern
$13.168
X
X
Mariana Islands
Ohio $55.138
X
X
X
Oklahoma $13.168
X
Oregon $16.516
X X X
Pennsylvania $29.241
X
X
Puerto Rico
$14.540
X
X
Rhode Island
$13.168
X
X
South Carolina
$17.990
X
X
South Dakota
$13.168
X
Tennessee $29.672
X
Texas $46.553
X
Utah $13.168
X
X
X
Vermont $13.168
X
Virgin Islands
$13.168
X
X
Virginia $17.953
X
X
X
X
Washington $19.722 X
X
X
West Virginia
$13.168
X
X
X
X
Wisconsin $22.363
X X
Wyoming,
$13.168
X X
Laramie
consortiumb
Source: U.S. Department of Treasury, “State Programs Funded by SSBCI,” at http://www.treasury.gov/resource-
center/sb-programs/Pages/ssbci.aspx; and U.S. Government Accountability Office, State Small Business Credit
Initiative, GAO-12-173, December 7, 2011.
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Notes:
a. The Mandan, North Dakota, led consortium of 37 municipalities and an Indian tribe was allotted $9.71
mil ion to administer a Loan Participation Program. The Carrington, North Dakota, led consortium of 36
municipalities was al otted $3.4 mil ion to administer a Collateral Support program and a Venture Capital
program.
b. The Laramie, Wyoming, led consortium includes 17 municipalities.
Approximately 34% of SSBCI funds have been allocated to loan participation programs, 29% to
venture capital programs, 15% to loan guarantee programs, 14% to collateral support programs,
and 8% to capital access programs.60
As mentioned previously, most states received their initial tranche in FY2011, and, as of June 30,
2014, all 57 participants had received their first tranche, 47 had received their second tranche, and
20 had received their third tranche.61 Treasury anticipates that most states will have received their
third, and final, tranche by the end of FY2015, depending on how quickly they expend, transfer,
or obligate their SSBCI funds.
States may 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 business investment
program. They are also subject to several reporting requirements. For example, states must submit
quarterly reports to Treasury describing the use of allocated funds for each approved program,
including the total amount of allocated funds used for direct and indirect administrative costs, the
total amount of allocated 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 are 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
P.L. 111-240 requires GAO to perform an annual audit of the SSBCI program. In addition, the act
requires Treasury’s OIG to conduct, supervise, and coordinate audits and investigations into the
use of SSBCI funds. GAO released its first annual audit of the program on December 7, 2011, the
second annual audit on December 5, 2012, and third annual audit on December 18, 2013.
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.
As of October 14, 2014, OIG had completed audits of 23 participants’ use of SSBCI funds
(California, Montana, Vermont, Michigan, Texas, Massachusetts, Delaware, New Jersey,
Alabama, Missouri, Washington, Kansas, Florida, Louisiana, West Virginia, Illinois, South
60 U.S. Department of the Treasury, “State Small Business Credit Initiative: A Summary of States’ 2013 Annual
Reports,” p. 9, at http://www.treasury.gov/resource-center/sb-programs/Documents/
SSBCI%20Summary%20of%20States%20Annual%20Reports%202013.pdf.
61 U.S. Department of the Treasury, “State Small Business Credit Initiative: A Summary of States’ Quarterly Reports as
of June 30, 2014,” p. 2, at http://www.treasury.gov/resource-center/sb-programs/Documents/
SSBCI%20Quarterly%20Report%20Summary%20June%202014v%20FINAL%20v2.pdf.
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Carolina, American Samoa, North Carolina, Idaho, Indiana, Tennessee, and the North Dakota
Mandan consortium).62
GAO’s 2011 Audit
GAO noted in its 2011 SSBCI audit that Treasury’s early implementation efforts were
appropriately focused on establishing the application process and the process for distributing
initial installments of funds to recipients as quickly as possible.63 Left unstated was that Treasury
was establishing policy guidelines and paperwork requirements for the program essentially from
scratch. Also, participants reported that nearly one-half of their SSBCI investment programs were
new.64 This suggests that at least some states had limited prior experience operating and
overseeing many of their small business investment programs.65
GAO found that Treasury issued an initial set of policy guidelines and application materials via
its website on December 21, 2010, and “was able to review, approve and obtain signed allocation
agreements with and distribute first installments of funds to two states in January 2011.”66 In
response to feedback from states, the SBA, and other federal agencies, Treasury decided to revise
its policy guidelines and application paperwork “to better articulate what documentation was
required for both the application and review processes.”67 Revised policy guidelines and
modifications to the allocation agreements were issued in April 2011. The two previously
approved states were asked to sign an amended allocation agreement that incorporated the
revisions.
GAO reported that several states indicated that they had delayed submitting their SSBCI
applications until Treasury issued its final application guidance and 37 states submitted 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
62 U.S. Department of the Treasury, Office of the Inspector General, Small Business Lending Fund Program Oversight
Office, “Small Business Lending Fund Oversight Reports,” at http://www.treasury.gov/about/organizational-structure/
ig/Pages/Office-of-Small-Business-Lending-Fund-Program-Oversight.aspx.
63 U.S. Government Accountability Office, State Small Business Credit Initiative, GAO-12-173, December 7, 2011,
p. 21, at http://www.gao.gov/assets/590/586727.pdf.
64 Ibid., p. 11.
65 An independent analysis of the SSBCI program funded by Treasury recommended that “Future federal venture
capital initiatives should require relevant program-specific training for VC program managers. VC program managers
empowered by state government leaders range from novice to expert with respect to their preparedness to manage VC
programs, and therefor need a common baseline of knowledge about options for design and operation of a state venture
capital program.” See Cromwell Schmisseur LLC, “Information and Observations on State Venture Capital Programs:
Report for the U.S. Department of the Treasury and Interested Parties in the State Small Business Credit Initiative
(SSBCI),” February 2013, p. 6, at http://www.treasury.gov/resource-center/sb-programs/Documents/
VC%20Report.pdf.
66 Ibid., p. 14.
67 Ibid.
68 Ibid., pp. 14, 15.
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GAO also found that Treasury finalized its disbursement procedures for second and third
installments of SSBCI funds at 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 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 that they contacted reported that they were ready for their
second installment before Treasury had finalized the disbursement procedures, but were told by
Treasury officials that they would have to wait until the disbursement procedures were finalized.70
GAO concluded its audit by noting that Treasury had not yet developed performance measures for
the SSBCI program. GAO noted that “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.
The following three performance goals reflect Treasury’s role in administrating the program,
which includes evaluating the eligibility of participating states and approved state programs;
providing program oversight, including compliance with the act’s provisions, SSBCI policy
guidelines, and the terms and conditions of the allocation agreements; and providing on-going
technical assistance related to the program’s implementation:
• 90% of requests for modifications to allocation agreements are approved or
rejected within 90 days of receiving a final submission;
• 90% of requests for subsequent disbursements under existing allocation
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
Treasury is tracking these performance goals continuously and reports 12-month data to the
Office of Management and Budget annually as part of its annual budget submission.
The following four performance indicators were established to serve as “benchmarks for any
future programs of a similar nature to the SSBCI”:73
69 Ibid., p. 16.
70 Ibid.
71 Ibid., p. 21.
72 U.S. Treasury, “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.
73 Ibid.
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• the amount of SSBCI funds used over time, as reported on SSBCI quarterly
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.
Treasury reports performance data internally to the Assistant Secretary of Financial Institutions
on an annual basis. Treasury also noted that these outcomes are not directly within its control,
given that it approves and provides funding for state loan and investment programs, while the
participating states are responsible for designing, establishing, and implementing the state
programs. Also, Treasury noted that
the results of these outcomes are highly dependent on exogenous factors such as the demand
for credit in a given locality and the quality of the small business borrowers’ requests for
such funds. Establishing these indicators for lending and investing activity as performance
goals would imply that Treasury has direct control where none exists. Nonetheless,
measuring these outcomes will be integral to assessing the relative utility of federal support
for these state programs and informing future policy direction.74
GAO’s 2012 Audit
GAO’s second annual audit of the SSBCI, 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 they 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 us that it could take time to use the funds because they had to
conduct extensive outreach to lenders to make them aware of the programs and encourage them
to commit to small business lending.”75
GAO noted that Treasury is authorized to revoke any portion of a participating state’s allocated
SSBCI funds that had not been transferred to the state by the end of the two-year anniversary of
the state’s approval to participate in the SSBCI. GAO noted that Treasury had not developed a
written policy on how it will use this authority, that most of the participating states’ two-year
period will end sometime in 2013, and “it is still unknown if they all will be able to use their
funds in the time to obtain the third and final disbursement within this time frame.”76 GAO noted
that although Treasury officials had indicated at an October 2012 conference attended by many
SSBCI participants that “Treasury did not currently plan to exercise this authority in the near
future,” GAO argued that “when states are required to spend federal funds to meet a statutory
74 Ibid.
75 U.S. Government Accountability Office, 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.
76 Ibid., p. 24.
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deadline or specific program requirements, agencies should provide guidance to the states on
what they should expect if they are unable to meet the deadline.”77 In the absence of a formal
written policy on this matter, GAO asserted that it was unclear how Treasury would use this
authority in a consistent manner.
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.”78
However, GAO noted that Treasury “has not yet determined how and when it will make this
information public.”79 GAO argued that “we recognize that 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
“performance information is an important tool for policymakers, particularly as Congress reviews
and considers programs to assist small businesses going forward.”80
Treasury’s Response to GAO’s 2012 Audit: Written Policy Guidance and
Publishing Performance Measures
In June 2013, Treasury responded to GAO’s recommendation for written policy guidance
concerning the Treasury’s discretionary authority to revoke a participating state’s allocated
SSBCI funds that had not been transferred to the state by the end of the two-year anniversary of
the state’s approval to participate in the SSBCI by disseminating, by email, a “Frequently Asked
Question” (FAQ) narrative on the topic to all participating states. Treasury also discussed its
policy guidance on this subject at the national SSBCI conference held on June 3 and 4, 2013.81
Treasury issued the following policy guidance on this subject:
Treasury will deem any Participating State that submits its second disbursement request by
June 30, 2015 and qualifies to receive that disbursement to have made sufficient progress in
implementing its Approved State Programs. For such a Participating State, Treasury will not
terminate the availability of any Allocated Funds that remain un-transferred as of that date,
and the Participating State will retain access to the full amount of its Allocated Funds for the
duration of the Allocation Time Period, which is March 31, 2017. For any Participating State
that Treasury determines has not qualified for its second disbursement of Allocated Funds
through a submission made by June 30, 2015, Treasury expects to conduct an analysis of the
Participating State’s progress in implementing its SSBCI programs at that time to determine
whether Treasury should exercise its authority to terminate the availability of un-transferred
funds.82
GAO reported in its 2012 audit that Treasury officials acknowledged the importance of making at
least some SSBCI performance information available for policymakers, but that Treasury had not
yet decided what specific information to share or how it will be presented because “they want to
77 Ibid., p. 25.
78 Ibid., p. 40.
79 Ibid.
80 Ibid, pp. 40-41.
81 U.S. Department of the Treasury, State Small Business Credit Initiative Office, “Email correspondence with the
author,” July 9, 2013.
82 Ibid.
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make sure the information reflects the outcomes in an appropriate manner.”83 Treasury officials
also informed GAO that they hoped to develop a method for sharing this information publicly
after they have had time to review the second annual reports that will be completed by the states
in 2013.84
On September 25, 2013, Treasury released the first of what will be an annual summary report of
performance information drawn from SSBCI participants’ annual reports.85 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’s third annual audit of the SSBCI, issued on December 18, 2013, found that although the
pace of participant SSBCI spending had increased since their second annual audit, participants
were still facing several challenges in using their SSBCI funds. For example, as of June 30, 2013,
Treasury had disbursed about $811 million in SSBCI funds to participants (about 54% of total
SSBCI funds). Eight participants had received their third and final tranche, 19 participants had
received their second tranche, and 30 participants were “still working to use their first
disbursement of SSBCI funding.”86 Participants had disbursed about $549 million of their
allotment of SSBCI funds (about 38% of total SSBCI funds).87 As of June 30, 2013, 18
participants had used more than 50% of their allocation, 14 participants had used more than 25%
but less than 50% of their allocation, 19 participants had used more than 10% but less than 25%
of their allocation, and 6 participants had used 10% or less of their allocation.88
Participants told GAO that the administrative challenges they faced early in the program’s
implementation that slowed their spending, such as Treasury’s delay in finalizing the program’s
guidelines and the learning associated with implementing a relatively large number of new small
business programs, were now largely resolved and “were issues that they would expect to occur
with the implementation of any new program.”89 Participants also told GAO that the unexpected
low demand for some SSBCI CAP programs also slowed their SSBCI spending. They explained
83 U.S. Government Accountability Office, Small Business Lending: Opportunities Exist to Improve Performance
Reporting of Treasury’s Programs, GAO-13-76, December 5, 2012, p. 35, at http://www.gao.gov/assets/660/
650555.pdf.
84 Ibid.
85 U.S. Department of the Treasury, 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.
86 U.S. Government Accountability Office, 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.
87 Ibid., p. 8.
88 Ibid., pp. 8-9.
89 Ibid., 13.
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that it took some time for them to reallocate funds from SSBCI programs experiencing low
demand to those experiencing higher demand.90
Participants indicated that they were now facing several new challenges in spending their SSBCI
allotment, including (1) the reluctance of large banks to participate in the program, (2) the Small
Business Jobs Act of 2010’s requirement that participants obtain certifications from lenders and
borrowers that they have not been convicted of a sex offense against a minor, and (3) concerns
expressed by some lenders that they could be subject to additional regulatory scrutiny for using
SSBCI programs to underwrite loans.91
Treasury officials and representatives of a trade association told GAO that the reluctance of large
banks to participate in the SSBCI was due to the variation of SSBCI programs across the nation.
They explained that “national banks typically design programs that can be implemented
consistently throughout the country and that they are reluctant to tailor different processes to each
SSBCI participant’s program.”92
Two SSBCI participants told GAO that there were banks that refused to participate in their
SSBCI programs because of the sex offender certification requirement.93 Several SSBCI
participants also told GAO that “some banks have determined that, for legal reasons, they are not
able to sign the certification, while other banks do not understand the need for the requirement.”94
To help address lenders’ concerns about being subject to additional regulatory scrutiny for using
SSBCI programs to underwrite loans, Treasury officials briefed officials from the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve, and the Office of the Comptroller of the
Currency (OCC) concerning the SSBCI program and provided them periodic program updates.
The FDIC and OCC also published guidance assuring their regulated entities that solely
participating in the SSBCI does not subject them to increased regulatory scrutiny.95
GAO concluded their audit by noting that Treasury had developed targets for its three measures
relating to administrative performance, but had not developed targets for its four measures related
to program performance. It recommended that Treasury establish targets for selected performance
measures related to monitoring program performance and seek input from program stakeholders,
including other agencies involved in promoting small businesses and Congress, as its designs its
SSBCI program evaluation.
Treasury’s Response to GAO’s 2013 Audit: Targets for Program Performance
Measures and Outreach
On December 4, 2013, Treasury officials informed GAO that it agrees with both of GAO’s
recommendations and has begun the process of establishing targets for program performance
90 Ibid., p. 16.
91 Ibid., p. 18.
92 Ibid.
93 Ibid.
94 Ibid.
95 Ibid.
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measures and for gathering input from program stakeholders in designing SSBCI program
evaluations.96
Treasury’s Inspector General Evaluation Reports
On August 5, 2011, Treasury’s OIG issued its first evaluation report examining the SSBCI
program.97 On the opening page, the OIG praised Treasury officials for “seeking our assistance
during the developmental stage of the program.”98 The OIG noted in the report 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.”99
After examining Treasury’s policy guidelines and 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 “supervision and oversight and accountability;
and set 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.”100 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.”101
Treasury took several immediate actions to address the OIG’s recommendations. For example, in
response to the 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 its SSBCI “Frequently Asked Questions” document on its
website “to combine all applicable oversight requirements in one place” and “elaborate on the
specific duty that each provision imposes upon the participating state.”102 In addition, Treasury
also 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, 2012.103
96 Ibid., p. 44.
97 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: Treasury
Needs to Strengthen State Accountability for Use of Funds,” August 5, 2011, at http://www.treasury.gov/about/
organizational-structure/ig/Pages/by-date-2011.aspx.
98 Ibid., p. 1.
99 Ibid., p. 14.
100 Ibid., p. 19.
101 Ibid., p. 20.
102 Ibid. p. 10.
103 U.S. Department of the Treasury, “SSBCI National Standards for Compliance and Oversight,” May 15, 2012, at
http://www.treasury.gov/resource-center/sb-programs/Pages/ssbci.aspx.
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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.104 As mentioned previously, as of October 14, 2014,
Treasury’s OIG had completed audits of 23 participants’ use of SSBCI funds (California,
Montana, Vermont, Michigan, Texas, Massachusetts, Delaware, New Jersey, Alabama, Missouri,
Washington, Kansas, Florida, Louisiana, West Virginia, Illinois, South Carolina, American
Samoa, North Carolina, Idaho, Indiana, Tennessee, and the North Dakota Mandan consortium).105
A summary of the OIG’s findings for each state is presented, starting with California.
In each audit, the OIG reviewed a judgmental sample of small business loans or investments to
“determine whether [the loans or investments] complied with program requirements for loan use,
capital at risk, and other restrictions.”106 The OIG then determined if there were “any instances of
reckless or intentional misuse.”107 Treasury is required to recoup any funds that the OIG identifies
as intentionally or recklessly misused.108 To date, only Texas, New Jersey, Louisiana, West
Virginia and the North Dakota Mandan consortium were found to be in full compliance with all
SSBCI requirements.
California
Treasury’s OIG determined that California had used the majority of the $3.6 million in SSBCI
loans it examined properly, but identified $133,250 in loan loss reserves funded under
California’s Small Business Loan Guarantee Program that did not comply with SSBCI program
requirements.109 The OIG indicated that these non-compliant expenditures “constitute a ‘reckless’
misuse of funds as defined by Treasury guidance, which under the provisions of the Small
Business Jobs Act must be recouped.”110 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.”111 The OIG also reported
104 U.S. Department of the Treasury, Office of Inspector General, “Small Business Lending Fund: California Needs to
Improve Its Oversight of Programs Participating in the State Small Business Credit Initiative,” May 24, 2012, at
http://www.treasury.gov/about/organizational-structure/ig/Agency%20Documents/OIG-SBLF-12-003.pdf.
105 U.S. Department of the Treasury, Office of Inspector General, Small Business Lending Fund Program Oversight
Office, “Small Business Lending Fund Oversight Reports,” at http://www.treasury.gov/about/organizational-structure/
ig/Pages/Office-of-Small-Business-Lending-Fund-Program-Oversight.aspx.
106 U.S. Department of the Treasury, Office of Inspector General, “Small Business Lending Fund: California Needs to
Improve Its Oversight of Programs Participating in the State Small Business Credit Initiative,” May 24, 2012, p. 2, at
http://www.treasury.gov/about/organizational-structure/ig/Agency%20Documents/OIG-SBLF-12-003.pdf.
107 U.S. Department of the Treasury, Office of Inspector General, Small Business Lending Fund Program Oversight
Office, “Fiscal Year 2013 Audit Work Plan,” pp. 12-29, at http://www.treasury.gov/about/organizational-structure/ig/
Pages/Office-of-Small-Business-Lending-Fund-Program-Oversight.aspx.
108 Ibid.
109 U.S. Department of the Treasury, Office of Inspector General, “Small Business Lending Fund: California Needs to
Improve Its Oversight of Programs Participating in the State Small Business Credit Initiative,” May 24, 2012, p. 3, at
http://www.treasury.gov/about/organizational-structure/ig/Agency%20Documents/OIG-SBLF-12-003.pdf.
110 Ibid.
111 Ibid.
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that “42 or approximately 58%, of the 73 loans we tested lacked all of the required borrower and
lender assurances.”112
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 required California program officials
to address missing borrower and lender certifications and assurances. Treasury subsequently
noted that any loans still missing required assurances and certifications had been un-enrolled, and
all other certification issues had been resolved.113
Montana
Treasury’s OIG found that Montana had misused $2.73 million of the $4.9 million 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 Business Jobs Act or SSBCI
Policy Guidelines.”114 The OIG also found that $3,426 in personnel costs incurred for
administering SSBCI funds were not allowable or allocable because the costs were not properly
supported as required by OMB Circular A-87.115
The OIG “did not find the misuse of funds to be intentional or reckless as Montana sought
guidance from Treasury before enrolling the loans.”116 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 allowable if the prior debt had
matured and new underwriting has occurred. The OIG noted that Treasury attempted to clarify 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 challenged 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.”117 The
OIG noted that there were no references in the Small Business Jobs Act or in Treasury’s SSBCI
Policy Guidelines concerning “re-funding.”118
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.119 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
112 Ibid.
113 Ibid., pp. 13-14.
114 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: Montana’s
Use of Funds Received from the State Small Business Credit Initiative,” September 27, 2012, at
http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/
OIGSBLF12006.pdf.
115 Ibid.
116 Ibid., pp. 2, 9.
117 Ibid., p. 3.
118 Ibid., p. 12.
119 Ibid., p. 16.
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amend the program procedural guidance to remove that possibility.”120 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 disallowed.121
Vermont
Treasury’s OIG examined 26 loans issued under Vermont’s four SSBCI programs and found that
Vermont’s interest rate subsidy program ($931,000 in SSBCI funding) did not comply with the
requirements established by its Allocation Agreement with Treasury.122 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.”123 The OIG recommended that Treasury require Vermont to provide a sub-accounting of
all the funds transferred in connection with the interest rate subsidy program as well 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 Allocation 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.”124 The OIG also found that
$216,820 in administrative expenses charged to the SSBCI program did not comply with program
guidance.125
Treasury agreed to require Vermont to provide a sub-accounting of all the funds transferred in
connection with the interest rate subsidy program as well as all program income generated from
the use of such funds.126 Treasury also agreed to determine whether “there has been a general
event of default under Vermont’s Allocation 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.”127 Treasury also agreed to
disallow 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-87.128
120 Ibid.
121 Ibid., p. 18.
122 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: Vermont’s
Use of Federal Funds for Capital Access and Credit Support Programs,” November 30, 2012, p. 2, at
http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-13-
001.pdf.
123 Ibid, pp. 2-3.
124 Ibid., pp. 3-4.
125 Ibid., p. 3.
126 Ibid., p. 15.
127 Ibid.
128 Ibid., p. 14.
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Michigan
Treasury’s OIG found that Michigan had used the majority of the $38.5 million in SSBCI loans it
examined properly, but identified “approximately $2.524 million in misuse of which $2.5 million
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 acceptance
into the SSBCI program and Treasury’s allocation of funds to the State.”129 The OIG found that
the $21,000 used to pay the CAP insurance premium was a “reckless” misuse of funds that must
be recouped. Although the OIG did not find the $2.5 million used to finance lender purchase
transactions that did not involve extensions of additional credit to borrowers as a “reckless”
misuse of funds, it did question whether the purchase transactions “are consistent with the intent
of the [Small Business Jobs] Act to help small businesses expand, grow, and create jobs.”130 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 were incurred prior to the
date Michigan was approved to participate in the program and notified of its SSBCI allocation
and recommended that those expenses be disallowed.131
Treasury agreed to issue guidance to address the conditions under which loan purchase
transactions would be permitted.132 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 of funds to the state and to disallow 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.133
Texas
Treasury’s OIG examined five investments, totaling $6.3 million, financed by the Texas Small
Business Venture Capital Program and found the program in full compliance with all SSBCI
requirements. The OIG credited the state’s “success in ensuring full compliance with SSBCI
requirements” to the state’s “use of a checklist to evaluate compliance with program requirements
prior to the completion of each transaction.”134
Massachusetts
Treasury’s OIG contracted with an independent certified public accounting firm to audit
Massachusetts’ use of SSBCI funds. As of June 30, 2012, Massachusetts had obligated or spent
129 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: Michigan’s
Use of Federal Funds for Capital Access and Other Credit Support Programs,” December 13, 2012, pp. 2-3, at
http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-13-
002.pdf.
130 Ibid., p. 3.
131 Ibid.
132 Ibid., p. 13.
133 Ibid., pp. 15-16.
134 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: Texas’ Use of
Federal Funds for Other Credit Support Programs,” January 29, 2013, p. 2, at http://www.treasury.gov/about/
organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-13-003.pdf.
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approximately $6.6 million of the SSBCI funds disbursed, including $4 million for the
Massachusetts Growth Capital Corporation (MGCC) Loan Participation Program, $2.1 million
for the Massachusetts Business Development Corporation (MBDC) Loan Participation Program,
and $211,000 for the Massachusetts Capital Access Program (MCAP). The Commonwealth 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
Massachusetts 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 “reported that they 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 federally-guaranteed
loans” and “the prohibition on credit enhancement did not pertain to the guaranteed portion of
federally-guaranteed loans.”135 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.136
The OIG recommended that Treasury “revise its program guidance to make the enrollment of
federally-guaranteed loans a clear prohibition, disallow $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 allocating administrative
costs.”137 The OIG also recommended “that Treasury determine whether there has been a general
event of default of the Allocation Agreement resulting from Massachusetts’ non-compliance with
lender/borrower assurance requirements, materially inaccurate certifications, and failure to report
program income.”138
In response to the OIG’s recommendations, Treasury indicated that it was in the process of
revising its program guidance on the enrollment of federally guaranteed loans, and will determine
whether Massachusetts has adequately cured its non-compliance with program requirements and
whether additional action is warranted. Also, Massachusetts clarified that while it reported
$200,000 in administrative expenses, it did not charge the SSBCI fund for them, and does not
intend to seek reimbursement from SSBCI for these expenses. 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.”139
135 Ibid., p. 7.
136 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative:
Massachusetts’ Use of Federal Funds for Capital Access and Other Credit Support Programs,” May 14, 2013, pp. 1-3,
at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/
OIGSBLF13007.pdf.
137 Ibid., p. 3.
138 Ibid.
139 Ibid., p. 19.
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Delaware
Treasury’s OIG found that as of September 30, 2012, Delaware had obligated or spent
approximately $4.1 million of its first SSBCI disbursement of $4.3 million—$80,883 for 36 loans
enrolled in the Delaware Access Program and approximately $4 million 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.140
The OIG did not identify any instances of intentional or reckless misuse of funds. However, it did
find that while Delaware obtained most borrower and lender assurances at loan closing, these
assurances did not contain all required affirmations.141 Several assurances were also missing
signatures or dates. In addition, the OIG found that Treasury became aware of Delaware’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 the missing 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.”142 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.”143 Also, Delaware officials reported that they had
implemented “additional precautions, including random audits of SSBCI loans, to ensure
compliance with use of proceeds, capital-at-risk, and assurance requirements.”144
New Jersey
Treasury’s OIG contracted with an independent certified public accounting firm to audit New
Jersey’s use of SSBCI funds.145 The accounting firm found that as of June 30, 2012, New Jersey
140 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: Delaware’s
Use of Federal Funds for Capital Access and Other Credit Support Programs,” March 29, 2013, p. 11, at
http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/
OIGSBLF13006.pdf.
141 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
proceeds must be used for an approved “business purpose” and the loan proceeds cannot be used to: repay a delinquent
federal or state income taxes unless the borrower has a payment plan in place with the relevant taxing 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’ continuance; or purchase any portion of the ownership interest of any owner of the business.
142 Ibid., p. 3.
143 Ibid., p. 4.
144 Ibid., pp. 3-4.
145 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: New Jersey’s
Use of Federal Funds for Other Credit Support Programs,” February 27, 2013, p. 2, at http://www.treasury.gov/about/
organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIGSBLF13005.pdf.
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had spent about $2.9 million of its first SSBCI disbursement of $11.1 million—$1.76 million for
two loan participations, $675,000 for a credit guarantee, and $500,000 for a direct loan.146
The accounting firm reviewed all four transactions and determined that New Jersey complied
with all program requirements in administering the $2.9 million in SSBCI funds. The OIG
concluded that New Jersey’s “success in ensuring full compliance was attributable to several best
practices that the New Jersey Economic Development Authority [which administers New Jersey’s
SSBCI program] employed to enhance its program oversight,” including the use of a “SSBCI
Application Eligibility Criteria Checklist” that “listed each of the required SSBCI assurances and
specific SSBCI program requirements which had to be completed and signed prior to each
transaction.”147
Alabama
Treasury’s OIG contracted with an independent certified public accounting firm to audit
Alabama’s use of SSBCI funds. The accounting firm reviewed all 14 loans enrolled in Alabama’s
Loan Guarantee Program, totaling approximately $3.8 million, made between the signing of the
SSBCI Allocation 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 they were allowable, reasonable, and allocable.
The audit found that Alabama complied with all program requirements in administering the $3.8
million 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 that the loan was in full compliance with SSBCI requirements.148 The audit
also found that Alabama had overstated the amount of SSBCI funds used by approximately $1
million on its March 31, 2012, Quarterly Report, and by approximately $4 million on 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 the inaccuracies were identified by Treasury and corrected prior to the audit,
the OIG made no recommendations concerning the errors.149
Missouri
Treasury’s OIG contracted with an independent certified public accounting firm to audit
Missouri’s use of SSBCI funds. The accounting firm reviewed all 17 SSBCI transactions between
the signing of the SSBCI Allocation Agreement on May 23, 2011, and March 31, 2012. These
transactions included 16 investments, totaling $6.6 million, by the Missouri Innovation,
Development, and Entrepreneurship Advancement (IDEA) Fund and one loan, totaling $511,135,
146 Ibid., p. 4.
147 Ibid., p. 8.
148 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: Alabama’s
Use of Federal Funds for Capital Access and Other Credit Support Programs,” June 4, 2013, p. 2, at
http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/
OIGSBLF13008.pdf.
149 Ibid., pp. 1-2.
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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
they were allowable, reasonable, and allocable. 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 determine whether
additional prohibited party relationships existed.”150
The OIG found that Missouri “properly used over 96% of the $7.3 million in SSBCI funds
expended, and that all related administrative costs were compliant with program requirements.”151
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 interest in the investee.”152 The director had
recused herself from the vote approving the investment. The OIG noted that the board should
have known that prohibited party relationships are not allowed because the SSBCI Policy
Guidelines “require every borrower and investee receiving funds to certify that such a
relationship did not exist.”153 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 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.”154 Nonetheless, Missouri took measures “to remedy the
situation and prevent similar issues in the future.”155 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.156
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.157
Washington
Treasury’s OIG contracted with an independent certified public accounting firm to audit
Washington’s use of SSBCI funds. The accounting firm reviewed all of the state’s $5.3 million in
SSBCI loans issued by Washington’s Enterprise Cascadia Loan Participation Program and all of
150 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: Missouri’s
Use of Federal Funds for Other Credit Support Programs,” July 24, 2013, p. 2, at http://www.treasury.gov/about/
organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIGSBLF13009.pdf.
151 Ibid., p. 3.
152 Ibid.
153 Ibid.
154 Ibid., p. 26.
155 Ibid., p. 22.
156 Ibid.
157 Ibid.
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the $1.7 million in investments issued by the state’s W Fund Venture Capital Program between
the signing of the SSBCI Allocation 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 they were allowable, reasonable, and
allocable.158
The audit determined that all $7.1 million in loans and venture capital investments “complied
with SSBCI program requirements and restrictions, and that borrower and lender assurances were
complete and timely.”159 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.”160 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.”161
Kansas
Treasury’s OIG contracted with an independent certified public accounting firm to audit Kansas’s
use of SSBCI funds. The accounting firm reviewed all of the state’s $1.53 million in SSBCI loans
issued by the Kansas Capital Multiplier Loan Fund and all of the $696,950 in investments issued
by the Kansas Capital Multiplier Venture Fund between the signing of the SSBCI Allocation
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 they were allowable, reasonable, and allocable.
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
aggregate financial arrangement.162 The OIG noted that there is a $20 million 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.”163 The OIG
recommended that Treasury clarify the requirement that SSBCI funds not be used to support loans
that exceed a principal amount of $20 million. Treasury agreed to revise the SSBCI Policy
Guidelines to clarify the requirement.164
158 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: Washington’s
Use of Federal Funds for Capital Access and Other Credit Support Programs,” August 15, 2013, pp. 1, 2, at
http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-13-
011.pdf.
159 Ibid., p. 2.
160 Ibid.
161 Ibid., p. 7.
162 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: Kansas’ Use
of Federal Funds for Other Credit Support Programs,” September 5, 2013, p. 2, at http://www.treasury.gov/about/
organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-13-013.pdf.
163 Ibid.
164 Ibid., p. 18. Note: Kansas officials explained that the three loans in question were (1) “made to separate legal entities
(continued...)
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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 non-profit entity
which, 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.165 The audit also
found that $13,181 of the $29,247 should be disallowed by Treasury because the funds were used
to pay audit and tax consulting costs which were not properly allocated through a cost allocation
plan or an indirect cost proposal as required by OMB Circular A-87.166 Treasury agreed to work
with Kansas “to correct its quarterly statements, remove the $13,181 in disallowed audit and tax
consulting costs from the State’s quarterly reports, and review Kansas’ cost allocation plan for
administrative costs.”167
Florida
Treasury’s OIG reviewed all 7 SSBCI venture capital investments, totaling $37 million, issued by
the Florida Venture Capital Program; and all 17 SSBCI loans, totaling approximately $14.6
million, issued by the Florida Loan Participation Program (11 loans, totaling $9.75 million),
Florida Direct Loans Program (1 loan, totaling $3.5 million), Florida Loan Guarantee Program (3
loans, totaling $1.37 million), and Florida Capital Access Program (2 loans, totaling $780 for
portfolio insurance) between the signing of the SSBCI Allocation Agreement on August 24, 2011,
and December 31, 2012.168 The OIG also reviewed the $378,634 in administrative expenses
Florida charged against SSBCI funds during that time period to ensure they were allowable,
reasonable, and allocable.
The OIG found that Florida “properly used the majority (92%) of the SSBCI funds it expended”
and that “23 of the 24 transactions we 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 Business Jobs] Act and SSBCI Guidelines.”169 The
questionable transaction involved the use of $4 million in SSBCI funds in a $34.7 million
investment “that involved multiple equity instruments, which we determined exceeded the $20
(...continued)
which were operated as separate businesses at separate locations, but who sold product to a common buyer”; (2) “not
contrived to avoid the $20 million cap on loans”; and (3) “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 ibid., p. 20.
165 Ibid., pp. 3, 12, 13.
166 Ibid., p. 13.
167 Ibid., p. 19. Treasury 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 ibid., p. 18. Treasury agreed
to clarify the SSBCI National Standards for Compliance and Oversight document to specify which companion lenders
must submit assurances.
168 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: Florida’s Use
of Federal Funds for Capital Access and Other Credit Support Programs,” November 15, 2013, pp. 1, 13, at
http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-14-
002%20Final%20Report%2011%2015%2013%20web.pdf.
169 Ibid., p. 7.
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million restriction in the [Small Business Jobs] Act intended [to] be placed on the amount of
credit support that may be extended to a recipient.”170 The OIG concluded that although two
equity instruments were involved [$4 million from the SSBCI and $30.7 million from private
capital], the transaction constituted one investment package because if the business were to fail,
both equity instruments would be affected.”171 The OIG recommended that Treasury “revise the
SSBCI Policy Guidelines to clarify how the $20 million restriction on credit support should be
applied when an investment involves multiple equity instruments.”172 Treasury agreed to revise
the program’s guidance concerning the $20 million credit support restriction.173
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 its administrative expenses to account for the error in its March 31,
2013, SSBCI Quarterly Report.174
The OIG also found that Florida had “overstated by approximately $23 million 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.”175
Florida officials asserted that its 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.176 However, state officials also noted that Treasury informed them in February 2013 that
“its 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 2013.177 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.”178 Treasury also agreed to
determine whether Florida has adequately addressed its reporting of obligated funds and whether
additional action is warranted.179
Louisiana
Treasury’s OIG examined all 16 SSBCI loans and investments, totaling $4.9 million, and
$206,007 in SSBCI administrative expenses reported by Louisiana between the signing of the
Allocation Agreement on August 24, 2011, and December 31, 2012.180 Of the $4.9 million,
170 Ibid.
171 Ibid., pp. 7, 8.
172 Ibid., p. 11.
173 Ibid., pp. 12, 15.
174 Ibid., p. 9.
175 Ibid., p. 4.
176 Ibid., p. 19.
177 Ibid.
178 Ibid., p. 20.
179 Ibid., p. 15.
180 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: Louisiana’s
Eligibility for its Second Transfer of Funds and the Allowability of Reported Administrative Expenses,” January 9,
2014, p. 1, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/
(continued...)
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approximately $1.1 million was used by the state’s Small Business Loan Guarantee Program and
$3.8 million was used by the Louisiana Seed Capital Program. The program was found to be in
full compliance with all SSBCI requirements.
West Virginia
Treasury’s OIG reviewed a random sample of 28 SSBCI loans and investments, totaling
approximately $9.5 million, 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 Allocation Agreement on November 18, 2011, and June 30, 2013. The
OIG also examined West Virginia’s $181,784 in SSBCI administrative costs. The program was
found to be in full compliance with all SSBCI requirements.181
Illinois
Treasury’s OIG examined a random sample of 48 SSBCI loans and investments, totaling $34.5
million, issued by Illinois’ five SSBCI programs (35 from the Illinois Participation Loan
Program, 8 from the Invest Illinois Venture Fund, 3 from the Illinois Capital Access Program, 1
from the Collateral Support Program, and 1 from the Conditional Direct Loan Program) between
the signing of the Allocation Agreement on July 26, 2011, and March 31, 2013. The OIG also
examined Illinois’ $1.03 million in SSBCI administrative costs.182
The OIG found that “Illinois appropriately used most of the $34.5 million 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 The OIG also identified 22 other transactions “that did not fully
comply with lender sex offender certification requirements” and found that “Illinois 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.184 Also, the OIG found that Illinois
unintentionally 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 million. This occurred because the
financing structure of the transaction was changed without the state’s knowledge. Illinois’
administrative costs were found to be in full compliance with all SSBCI requirements.185
(...continued)
OIGSBLF14003.pdf.
181 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: West
Virginia’s Use of Federal Funds for Other Credit Support Programs,” March 19, 2014, pp. 1-2, at
http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-14-
004.pdf.
182 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: Illinois’ Use
of Federal Funds for Capital Access and Other Credit Support Programs,” March 26, 2014, p. 17, at
http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-14-
005.pdf.
183 Ibid., pp. 2-3.
184 Ibid., p. 3.
185 Ibid., pp. 12-13.
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Treasury informed the OIG that it will recoup from Illinois the $105,000 expenditure identified
by the OIG as being a prohibited expenditure, require Illinois to modify any Master Agreements
with lenders that do not include required language that mandates lenders notify the state of
changes in the sex offender status of their principals, and require Illinois to provide lender
certifications when it is acting as a direct lender under the SSBCI program. Treasury also
indicated that it will work with Illinois to adjust the $4.7 million 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’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 million, between the signing of the
Allocation Agreement on July 6, 2011, and June 30, 2013. The OIG also examined South
Carolina’s $136,449 in SSBCI administrative costs.187
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 The OIG noted, however, that while South Carolina misused those funds, the
misuse was “not reckless or intentional because SSBCI Policy Guidelines do not explicitly
prohibit the use of SSBCI funds for non-secular purposes.”189 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 South Carolina’s administrative charges were found to be in full compliance
with all SSBCI requirements.
Treasury informed the OIG that it will 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.191 South Carolina informed
Treasury that it had added an additional line item to its internal control compliance checklist to
ensure that all borrower and lender assurance requirements are signed and dated prior to the
transfer of SSBCI funds.192
186 Ibid., pp. 19-20.
187 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: South
Carolina’s Use of Federal Funds for Capital Access and Other Credit Support Programs,” March 26, 2014, p. 12, at
http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-14-
006.pdf.
188 Ibid., pp. 2-3.
189 Ibid., p. 3.
190 Ibid.
191 Ibid., pp. 13-14.
192 Ibid., p. 16.
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American Samoa
American Samoa was awarded $10.5 million in SSBCI funds in January 12, 2012, and received
its first disbursement of $3.465 million 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 “were 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 “identified $49,155 in unsupported personnel and travel expenses that should be
disallowed,” and found that “American Samoa has not provided Treasury with records that would
allow the Department to determine whether the Territory is ‘fully positioned’ to provide credit
support to small businesses, as required by its Allocation Agreement.”194 The OIG also found that
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 Agreement; and incorrectly certified the accuracy of two quarterly
reports to Treasury and did not certify the accuracy of three other quarterly reports.”195 Based on
its findings, the OIG recommended that Treasury disallow 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 Allocation Agreement, and approve the agreement
modifications, before disbursing additional funds.”196
Treasury informed the OIG that it will disallow the $49,155 in unsupported administrative costs,
determine whether American Samoa has again defaulted on its Allocation Agreement, and
determine what form of remedy may be appropriate.197 Treasury also indicated that if American
Samoa’s funding is not terminated, that Treasury “will not disburse additional funds before
requiring that the Territory first comply with the terms of the Allocation Agreement.”198
Officials with American Samoa’s Department of Commerce agreed with the recommendation to
disallow 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.199 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 our knowledge Treasury SSBCI supported the decision
193 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: American
Samoa’s Administrative Expenses and Reporting,” March 26, 2014, p. 1, at http://www.treasury.gov/about/
organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-14-007.pdf.
194 Ibid., p. 2.
195 Ibid., pp. 2-3.
196 Ibid., p. 13.
197 Ibid., p. 17.
198 Ibid.
199 Ibid., p. 19.
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made by the Governor.”200 They also noted that since the audit they had filed with Treasury all
missing quarterly and annual reports, hired consultants to design and implement a compliance
program for their SSBCI program, and sent, in February 2014, a modified Allocation Agreement
for Treasury’s review. They requested that Treasury approve the program modification changes it
requested, and maintained that American Samoa’s SSBCI program now “complies with all
Treasury regulations and guidance and is fully positioned to provide small businesses with credit
assistance.”201
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
North Carolina Loan Participation Program, and 5 were from the North Carolina Venture Capital
Fund-of-Funds Program), totaling $4.9 million, between the signing of the Allocation 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
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
The OIG noted that “such refinancings are prohibited by the [Small 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
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.205 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.
North Carolina also “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 million in capital commitments with SSBCI funds to four angel
investment funds as obligated funds even though only $2.9 million had been pledged to
investees.”206 The OIG expressed concern that “while obligating funds on a multi-year basis
generally is an accepted practice,” using capital commitments to angel investment funds with
multi-year 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 Business Jobs
200 Ibid.
201 Ibid., pp. 14, 19-24.
202 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: North
Carolina’s Use of Federal Funds for Capital Access and Other Credit Support Programs,” March 27, 2014, pp. 1-2, 16,
at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-
14-009.pdf.
203 Ibid., pp. 3, 8-9.
204 Ibid.
205 Ibid. pp. 10-11.
206 Ibid., pp. 3-4.
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Act.”207 The OIG found that all 46 administrative cost transactions it reviewed were in full
compliance with SSBCI guidelines.208
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 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 include only
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 program reporting purposes instead of defining “funds
used” differently for different purposes.209
Treasury informed the OIG that it will (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 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 business investments; and (5) make every
effort to follow the definition of “funds used” in the SSBCI Policy Guidelines.210
Idaho
Treasury’s OIG examined a random sample of 30 SSBCI loans enrolled in the Idaho Collateral
Support Program (ICSP), totaling $50.3 million, for which Idaho provided $7.6 million in
collateral; and 12 loans that were committed for enrollment into the ICSP, totaling $10.8 million,
for which Idaho had reserved $2 million 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’s final allotment by $31,806 for expenses that were not adequately supported
in accordance with OMB Circular A-87. Subsequent to that review, Idaho reported an additional
$272,744 in administrative expenses, as of September 30, 2013. The OIG reviewed the additional
$272,744 in administrative expenses for compliance with SSBCI guidelines.211
The OIG found that Idaho appropriately used the $9.6 million in collateral support that was
reviewed, but “mistakenly overstated by $111,923 the total principal for 3 of [the] 42 loans we
reviewed because the amounts reported were not based on the final loan documents.”212 The OIG
207 Ibid., p. 14.
208 Ibid., p. 16.
209 Ibid., p. 17.
210 Ibid., pp. 18, 22-23.
211 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: Idaho’s Use
of Federal Funds for its Collateral Support Program,” May 19, 2014, pp. 2, 10, at http://www.treasury.gov/about/
organizational-structure/ig/Audit%20Reports%20and%20Testimonies/
Idaho%2005%2019%202014%20FINAL%20for%20web.pdf.
212 Ibid., p. 3.
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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
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 2013 Annual 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
“which now require a copy of the 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
that the amount reported is the actual amount of the executed loan.214 Idaho also indicated that it
“will work with Treasury to rectify the erroneous inclusion of subsequent private financing and
incorrect loan origination amounts in their 2012 report.”215 Treasury informed the OIG that it
would work with Idaho to resolve the issues identified in the audit.216
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
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
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.218 Elevate Ventures manages
the IANF’s investments on behalf of the Indiana Economic Development Corporation (IEDC),
and approved and executed the two investments in question.
The OIG found that the $499,986 investment constituted an “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 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
213 Ibid.
214 Ibid., pp. 16-17.
215 Ibid., p. 14.
216 Ibid.
217 The 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 loan guaranty program. The OIG expressed
concern that Treasury’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. Treasury agreed to
explain clearly in the Summary of States’ Annual Reports that there is a possibility for duplicate reporting of job
creation and retention figures in such circumstances. See ibid., pp. 5-7, 11, 15.
218 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: Indiana’s Use
of Federal Funds for Other Credit Support Programs,” June 18, 2014, pp. 2, 6-10, at http://www.treasury.gov/about/
organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIGSBLF14011.pdf
219 Ibid., p. 6.
220 Ibid.
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Intentional misuse of funds “is defined as a use of allocated funds that the participating state or its
administering entity knew was unauthorized or prohibited.”221
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 CEO), while not prohibited, “may
raise the appearance of partiality and should be addressed by SSBCI Policy Guidelines.”222
The OIG recommended that (1) Treasury recoup the $499,986 of federal funds “intentionally”
misused and declare a specific event of default of its Allocation 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
Treasury agreed with all three recommendations, but indicated that it “would not characterize [the
$499,986] investment as an ‘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
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
Indiana also reported that it “will independently review any future potential investment
conflict.”226
Tennessee
Treasury’s OIG examined a random sample of 20 SSBCI investments made by Tennessee’s
INCITE Co-Investment Fund, a venture capital program, totaling $13.5 million. The sample was
drawn from the 43 investments made by the fund between October 4, 2011 (the signing of the
state’s SSBCI allocation agreement) and September 30, 2013. The OIG also reviewed a sample of
the state’s SSBCI administrative expenses ($483,254 out of $685,880) which had been incurred
as of September 30, 2013.227
221 Ibid., p. 1.
222 Ibid., p. 10. The 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. Therefore, while the investment constituted a related party transaction, it did not meet
the criteria needed to establish it as a prohibited related party interest. The 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 ibid., p. 9.
223 Ibid., p. 10.
224 Ibid., pp. 10-11, 14.
225 Ibid., pp. 16-17.
226 Ibid.
227 U.S. Department of the Treasury, Office of Inspector General, “State Small Business Credit Initiative: Tennessee’s
Use of Federal Funds for its Venture Capital Program,” August 20, 2014, pp. 1-2, at http://www.treasury.gov/about/
organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIGSBLF14012.pdf.
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The OIG found that Tennessee had appropriately used all $13.5 million in SSBCI funds that were
reviewed, but “investor use-of-proceeds assurances were missing for all 20 transactions reviewed,
and investor sex offender assurances had not been executed prior to the transfer of SSBCI funds
for 12 of the transactions.”228 As a result, the OIG found that the state had inaccurately certified
that it was in compliance with all SSBCI requirements in several quarterly 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” and “its assurances are now 100% complete.”229
The OIG found that all of Tennessee’s sampled administrative expenses were reasonable,
allowable, and allocable to the program.230
North Dakota Mandan Consortium
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 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 agreement) and March 31, 2014. The OIG also reviewed the consortium’s
$194,101 in SSBCI administrative expenses.231
The OIG found that the Mandan consortium used all of the loan funds it reviewed appropriately.
The OIG also found that the consortium’s administrative expenses were reasonable, allowable,
and allocable to the program.232
Concluding Observations
The SSBCI was enacted as part of a larger effort to enhance the supply of capital to small
businesses. Advocates argued that the SSBCI would help to address the recent decline in small
business lending and create jobs. Opponents were not convinced that it would enhance small
business lending, and worried about the program’s potential cost to the federal treasury.
As mentioned previously, it is still too early to determine the full extent of the program’s effect on
small business lending. Less than two-thirds (about 61%) of the program’s funds have been
obligated or spent by the states. Also, as Treasury has noted, determining the SSBCI’s influence
on small business lending is likely to be more suggestive than definitive because differentiating
the SSBCI’s effect on small business lending from other, exogenous factors, such as changes in
the lender’s local economy and changes in the demand for small business loans, is
228 Ibid., pp. 3, 5-7.
229 Ibid., p. 10.
230 Ibid., p. 8.
231 U.S. Department of the Treasury, Office of Inspector General, “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
http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/
OIGSBLF14013.pdf.
232 Ibid., p. 7.
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methodologically challenging, especially given the relatively small amount of financing involved
relative to the national market for small business loans. As mentioned previously, the SSBCI’s
$1.5 billion in financing represents about 0.25% of outstanding non-agricultural small business
loans.233
Treasury’s OIG’s audits of 23 states’ implementation of their SSBCI programs suggests that many
states have experienced difficulty reaching full compliance with the program’s administrative
requirements, which are designed to reduce the likelihood of loan defaults, investment losses, and
fraudulent use of funds. The release of Treasury’s SSBCI National Standards for Compliance and
Oversight document, on May 15, 2012, proved useful as states become more familiar with, and
accustomed to, the SSBCI’s rules and regulations.234 However, given the relatively large number
of new small business investment programs receiving SSBCI funding, the relatively large number
of entities involved in the program (Treasury officials, state officials, hundreds of lenders and
investment companies, and thousands of small businesses), program oversight is likely to remain
a congressional concern.
Author Contact Information
Robert Jay Dilger
Senior Specialist in American National Government
rdilger@crs.loc.gov, 7-3110
233 Federal Deposit Insurance Corporation, “Statistics on Depository Institutions,” at http://www2.fdic.gov/SDI/
main.asp. As of June 30, 2014, there was $589,745,258,000 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”).
234 U.S. Department of the Treasury, “SSBCI National Standards for Compliance and Oversight,” May 15, 2012, at
http://www.treasury.gov/resource-center/sb-programs/Pages/ssbci.aspx.
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