December 20, 2002 |
2002-R-1020 | |
ANALYSIS OF PROPOSED MICRO ENTERPRISE PARTNERSHIP BILL | ||
By: John G. Rappa, Principal Analyst | ||
You asked use to analyze and comment on your draft of a proposed micro enterprise bill, which you intend to introduce during the 2003 legislative session.
SUMMARY
The bill creates a micro enterprise partnership program under which local and statewide organizations qualify for grants to assist businesses with fewer than 10 employees. It requires the Department of Economic and Community Development (DECD) to provide the grants directly to "micro loan delivery organizations" or indirectly to them through "statewide micro lending support organizations. " It does not appropriate any funds for the program or identify potential funding sources.
GOALS (SECTION 3)
The bill addresses three different sets of goals. One set concerns developing micro enterprises by
1. providing funds for creating micro enterprises and
2. helping new and existing micro enterprises create jobs.
Another set addresses the ability of individuals to create or manage these enterprises. It includes enhancing their entrepreneurial skills and activity and helping low-income households become self-sufficient.
The third set concerns developing the organizational infrastructure needed to support micro enterprises by:
1. facilitating the development of a permanent statewide infrastructure of micro lending organizations to serve the "micro enterprise and self-employment sectors,"
2. establishing DECD as the coordinating office for facilitating micro lending and micro enterprise development, and
3. allowing it to:
a. grant funds to community-based micro enterprise development organizations so that they can encourage the development and growth of micro enterprises and
b. contract with statewide micro lending organizations that have the capacity to administer the funds on DECD's behalf.
Comment This third set of goals (particularly facilitating the development of a permanent statewide infrastructure) suggests that such an infrastructure does not exist. But the administrative structure and process the bill delineates for assisting micro businesses suggests that it does. As discussed below, the bill requires DECD to award grants based on an organization's capacity to plan for and administer a micro enterprise development and financing program. But if the infrastructure does not exist, there may be no organizations that can meet the regulatory grant criteria DECD must adopt. For this reason, the state may first need to devote resources to helping organizations develop the skills and expertise needed to provide technical and financial assistance to micro enterprises. |
TARGETED GROUPS
A business qualifies for assistance based on the number of people it employees, regardless of its annual revenues. New and existing businesses with 10 or fewer employees are, by the bill's definition, micro enterprises and thus eligible for loans. (The bill does not appear to authorize grants to them. ) The bill expressly includes startups, home-
based businesses, and self-employed individuals (Section 4. 3). The bill's goal statements also include low-income households that seek to become self-sufficient by starting their own businesses (Section 3. 1).
FUNDING STRUCTURE AND REQUIREMENTS
DECD
The bill requires DECD to provide funds to micro enterprises through intermediaries. It can grant funds to organizations that work directly with micro enterprises (i. e. , micro loan delivery organizations) or delegate this task to organizations that operate on a statewide basis (i. e. , statewide micro lending support organizations) (Sections 5. 1 and 5. 2). The bill allows DECD to tap other state and federal programs to fund the micro enterprise program (Section 5. 3). DECD must adopt implementing regulations (Section 11).
Micro Loan Delivery Organizations
DECD can grant up to $ 25,000 directly to these organizations (Sections 4. 4 and 5. 1), which can use the funds to:
1. match federal or private dollars,
2. capitalize micro lending revolving funds,
3. guarantee loans banks make to micro enterprises, and
4. cover the cost of making loans and training and assisting loan recipients (Sections 7. 4 and 4. 6).
Organizations qualify for grants if they are community-based or constituted as a "nonprofit program" and have a viable plan to train micro business owners and help them access financing and run their businesses (Section 4. 5). They must match the DECD money with non-state funds "equivalent in money or in kind equal to one dollar for each dollar of the grant funds requested"(Section 8. 1).
Comment The reference to "nonprofit program" appears to be a drafting error. Organizations are usually constituted as for profit or nonprofit organizations. |
DECD must adopt funding criteria, which must address an organization's:
1. plan for providing technical and financial assistance to micro enterprises,
2. scope of services,
3. plan for coordinating the services and loans with banks,
4. ability to help businesses develop in economically distressed areas,
5. ability to train and assist micro enterprise clients, and
6. ability to monitor and oversee their micro enterprise borrowers.
DECD must also consider the extent to which an organization serves urban and rural neighborhoods and its funding sources (Section 6).
Organizations receiving grants must lend at least half of the amount in loans under $ 10,000.
Comment The bill does not specify the interest rate and the types of terms and conditions the organizations can impose on loan recipients. Interest allows the organizations to generate revenue for making additional loans and covering some of their operating costs, while the loan terms and conditions allow borrowers to develop a credit history. But these requirements could also discourage potential borrowers from applying for loans. |
Statewide Micro Lending Support Organizations
The bill allows DECD to delegate the task of administering the grants to "statewide micro lending support organizations" (Section 5. 2), which can be community-based or nonprofit organizations. These organizations qualify for grants if they have plans and expertise needed to grant or lend funds to micro loan delivery organizations (Section 4. 8). (While the bill allows DECD to award only grants, it allows statewide micro lending support organizations to grant or lend the funds. )
They must award the grants under the same conditions as DECD (Section 9. 2) and comply with the same matching funds requirement that apply to micro loan delivery organizations (Section 9. 1). These provisions suggest that both types of organizations must match the DECD funds. The statewide micro lending support organizations can use no more than 10% of the grant amount to cover the cost of administrative or operating the grant program (Section 9. 3). The bill imposes no comparable limit on micro loan delivery organizations.
ACCOUNTABILITY (SECTION 10)
The bill requires DECD to report annually to the legislature on the program. The reports are due January 1 and must at least describe the demand for micro loans by micro lending organizations and their borrowers and list each borrower and the loan amount.
The reports must also discuss the program's effectiveness during the prior fiscal year. They must identify the grants' impact, describe how they allowed the micro lending organizations to form partnerships with banks, and evaluate the extent to which the organizations met their goals. (The bill does not require the grant recipients to set goals. )
To satisfy these requirements, DECD can require the grant recipients to periodically report to it.
JR: ro