Benchmarking State Business Capital Programs

Transcription

1 Benchmarking State Business Capital Programs Prepared for: Business Oregon Prepared by: Council of Development Finance Agencies October 2014

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3 Contents Executive Summary... 4 About the Report... 5 Section A: Portfolio Analysis... 6 About the Analysis... 7 Oregon Business Finance Programs... 8 Program Performance Benchmarks Program Use by Market Segments Program Use by Core Industries Program Evaluation Matrix Section B: Demand / Supply Match Analysis Business Oregon Loan Programs, Mission & Strategies Strong Programs with Strong Positions Sound Programs with Growth Opportunities Market Needs & Concerns Program Weaknesses Section C: Alternative Coverage Assessment Comparison State Alternative Coverage Programs State Comparison Matrix Business Finance Program Recommended Practices Methodology for Portfolio Outcome Comparison Section D: Recommendations Coverage for Phases of the Business Life Cycle Diversification of Risk Competitive Advantages and Disadvantages Market Opportunities Program Refinements Credit Enhancement Tools Marketing Programs to Lenders & Businesses Program Alignment with Mission: Self-Sustaining Programs Program Alignment with Mission: Job & Wage Impacts Program Alignment with Mission: Key Industry Support Acknowledgements Benchmarking State Business Capital Programs 3

4 Executive Summary Benchmarking State Business Capital Programs evaluates Business Oregon s business finance programs and recommends opportunities for growth. The report was created to address four objectives: evaluate existing programs, review outcomes in light of the organization s mission and vision, compare program coverage to that of other states and provide recommendations for improvements and growth. The Portfolio Analysis (Section A) subjects Business Oregon s finance programs are to a thorough analysis of program loan and portfolio data. Several results are particularly noteworthy: The state s business finance programs are strong financial assets as indicated by records of relatively low losses and substantial reserve funds. The programs have provided exceptionally strong report to the state s manufacturing sector. Program loans, credit and grants have been distributed effectively from county, urban versus rural and distressed versus non-distressed perspectives. The Demand/Supply Match Analysis (Section B) evaluates program outcomes against the mission and vision and provides a strengths and weaknesses analysis. Highlights include the following: Programs investment and job outcomes effectively align with Business Oregon s mission of improving the state economy and developing living-wage employment opportunities. The state s business finance programs could further work toward this mission by expanding to additional industrial sectors and being more aggressive in their financial assistance. The Alternative Coverage Assessment (Section C) compares Oregon s business finance programs to Colorado, Maine, Maryland and Washington, as well as national standards. Observations include: Oregon provides robust coverage for manufacturers and offers a relatively impressive array of lending and credit enhancement programs. Program coverage for non-manufacturing industries and for innovative and emerging companies is less comprehensive than that of the comparison states. Recommendations (Section D) cover a wide range of evaluation points and include the following: Oregon should explore programs extending coverage to innovative and emerging companies. Program policies should allow for more flexible rates and terms and should use this flexibility to provide financial assistance to a wider range of businesses and projects. The Department should expand its outreach efforts to simplify program language as much as possible and reach new segments of potential borrowers. Benchmarking State Business Capital Programs 4

5 About the Report Benchmarking State Business Capital Programs was prepared by the Council of Development Finance Agencies (CDFA) on behalf of Business Oregon to evaluate the Department s current finance programs and provide feedback on opportunities for growth. The report was guided by the following objectives: Evaluate and benchmark the main business finance programs included within Oregon s portfolio, as well as the State Reserve Fund. Review Business Oregon s mission, vision and strategy and assess how well the programs are in line with growing businesses, leveraging funding and supporting quality jobs. Gauge the business finance programs of comparable states and evaluate Oregon s coverage across key finance areas. Develop a series of recommendations for Oregon to implement sustainably while seizing opportunities for growth in business development. To complete Benchmarking State Business Capital Programs, CDFA analyzed several sources of information. Business Oregon provided program loan and portfolio data, as well as background materials on each program. CDFA researched additional program information in Oregon, as well as throughout the country. Finally, CDFA also interviewed representatives of closely related finance entities in each state used for the comparison benchmarks. These information sources built on CDFA s existing knowledge and experience in economic development finance. CDFA is a national association dedicated to the advancement of development finance concerns and interests with experience in research and advisory services. In the area of business finance programs, CDFA is a leading educator on bond finance and revolving loan funds. CDFA also hosts the State Small Business Credit Initiative Coalition, which is dedicated to promoting best practices for public-private lending, credit enhancement and venture capital programs. Benchmarking State Business Capital Programs is divided into four sections based on the objectives outlined above: Section A provides a systematic analysis of Business Oregon s existing portfolio. Section B reviews program outcomes in light of the organization s mission and provides an overview of strengths and weaknesses. Section C is a comparison of Oregon to other states and national best practices. Section D provides recommendations for Business Oregon to consider as the organization continues to improve its position as a national leader in business finance. Benchmarking State Business Capital Programs 5

6 Benchmarking State Business Capital Programs Section A: Portfolio Analysis Section B: Demand / Supply Match Analysis Section C: Alternative Coverage Assessment Section D: Recommendations Benchmarking State Business Capital Programs 6

7 About the Analysis The Portfolio Analysis provides a review of Business Oregon s finance programs from a variety of perspectives, including losses, job support and geographic coverage. The analysis primarily covers the state s main lending programs (Capital Access Program, Collateral Enhancement Fund, Entrepreneurial Development Loan Fund, Industrial Development Bonds, Oregon Business Development Fund), as well as the State Reserve Fund. The programs that do not receive analysis in this section primarily provide reimbursement to companies (Oregon Trade Promotion Program, State Trade and Export Program), emergency business support (Business Retention Program) or are targeted to local governments (Brownfields Retention Fund). The purposes and terms of these programs are therefore largely incomparable to the business finance programs discussed in detail below. Business Oregon provided the data used in the following analyses. The majority of the data is from the Department s loan management system. The State Reserve Fund data is stored separately and is therefore either provided separately in the analyses below, or noted when used in combination. Unless otherwise noted, analyses include data from January 2004 through July 2014 and readers should keep in mind that 2014 data is incomplete when reviewing the historical analyses. In the interest of serving businesses as efficiently as possible, Business Oregon does not require that every possible piece of potentially interesting information be collected for every loan for all programs. In the interest of comparability, analyses are made across all available programs for each item of interest. However, the reader should be considerate of the fact that some program-to-program differences may be due to different measurement choices, rather than true differences between programs. The analyses make an effort to explain such possibilities as they are apparent. The Portfolio Analysis begins by benchmarking the programs along dimensions such as asset quality, private leverage and geographic coverage. The analysis then addresses industry coverage from several perspectives. Finally, a matrix is provided to further synthesize program comparisons. Benchmarking State Business Capital Programs 7

8 Oregon Business Finance Programs Business Oregon operates one of the most robust set of business finance programs in the country. The following subsections provide an overview of each program, as well as details including program eligibility, rates and terms. Table 1. Business Oregon Loans by Program, Program Total Capital Access Program Credit Enhancement Fund Entrepreneurial Development Loan Fund Industrial Development Bonds Oregon Business Development Fund Strategic Reserve Fund Total ,670 Figure 1. Business Oregon Finance Program Loans, The SRF figures, although comparable, are measured according to different standards and requirements than the other Oregon business finance programs. Benchmarking State Business Capital Programs 8

9 Oregon Business Development Fund (OBDF) The OBDF is a revolving loan fund capitalized from the U.S. Economic Development Administration, the Oregon General Fund and the Oregon State Lottery. The fund provides long-term, fixed-rate financing for land, buildings, equipment and machinery, as well as permanent working capital. OBDF is divided into two accounts: the Regular OBDF, which is available statewide, and the Targeted OBDF, which has funds set aside for distressed areas of the state. Rates, terms and structuring requirements vary between the accounts. Section Type of Financing Eligibility Criteria Amount Rates Terms Other Details Business Finance Direct Loan Manufacturing, processing and distribution Targeted program only available for distressed areas In most cases, up to 40% of project up to $1 million Regular: Treasuries plus 1% fixed Targeted: Prime minus 4% (4% minimum) fixed Regular: Useful life of assets up to 20 years Targeted: 5 years (15 year amortization) Collateral required Regular: Subordinate lien position to primary lender Targeted: Co-equal 1 st lien position with primary lender Figure 2. OBDF Loans and Amount, Benchmarking State Business Capital Programs 9

10 Oregon Capital Access Program (CAP) CAP helps lenders (banks and credit unions) make more commercial loans to small businesses and provides capital for start-up or expansion. The program is designed for non-profit and for-profit businesses seeking funds for most business purposes. Section Type of Financing Eligibility Criteria Amount Rates Terms Other Details Business Finance Loan Guarantee - Lender approval (no state underwriting) All types of loans and lines of credit are eligible. Lenders build a loan-loss reserve each time they enroll a loan. Contributions to the loan-loss reserve account are matched by Oregon Capital Access Program. Any amount Set by lender Set by lender Business Oregon contributes to Lender s loan loss reserve account (maximum contribution of $35,000 per borrower) Figure 3. CAP Loans and Amount, Benchmarking State Business Capital Programs 10

11 Oregon Credit Enhancement Fund (CEF) Designed to help businesses that are having difficulty accessing conventional financing, CEF provides lenders with additional security, thereby encouraging greater lender activity to Oregon businesses. In agreeing to insure a business loan, the department assumes responsibility for up to 90 percent of a loan made by a lender should the business default or otherwise be unable to make scheduled payments. Section Type of Financing Business Finance Loan guaranty tool for lenders; term loans and lines of credit Eligibility Criteria Most types of businesses eligible statewide until June 30, 2015 Amount Rates Terms Maximum guarantee amount: Up to $1,500,000 line of credit Up to $2,000,000 term loan 2.0% - 3.5% depending upon the term of the loan. Up to 5 years Figure 4. CEF Loans and Amount, Benchmarking State Business Capital Programs 11

12 Oregon Industrial Development Bonds (IDB) IDBs can be issued for qualified manufacturing projects throughout Oregon. Bonds can be issued on a tax-exempt basis if the project qualifies as a federal private activity bond for small manufacturers. Other projects may be issued on a taxable basis. The interest paid on tax exempt bonds is excluded from federal and (in some instances) state income taxes. Tax-exempt interest rates are typically percent of conventional rates. Section Type of Financing Eligibility Criteria Amount Rates Terms Other Details Business Finance Bonds Manufacturing and solid waste facilities; typically limited to new land, building and equipment Maximum $10 million (manufacturing), no limit (solid waste facilities) Fixed or variable; generally % below conventional loans 1.2 times the average economic life of the project assets State does not guarantee bond, borrower is responsible for providing collateral and repaying the bond Figure 5. IDB Loans and Amount, Benchmarking State Business Capital Programs 12

13 Entrepreneurial Development Loan Fund (EDLF) EDLF provides direct loans to help start-ups, micro-enterprises and small businesses launch or expand in Oregon. This fund fills a specific business need not met through traditional commercial lending. Section Type of Financing Eligibility Criteria Amount Rates Terms Other Details Business Finance Direct Loan Participants must meet one, or both, of the following criteria: have revenues of less than $500,000 in the previous 12 months or be a business owned by a severely disabled person. Initial loans - $50K max Follow-on loans - $70K max combined Rate is 2% over prime, fixed 5 years max An applicant for the program must be enrolled in a counseling program offered by an SBDC or other certified entity. Figure 6. EDLF Loans and Amount, Benchmarking State Business Capital Programs 13

14 Oregon Trade Promotion Program (OTPP) Oregon offers financial assistance to companies seeking to participate in international trade shows and missions to enter or expand their reach, in international markets. Through OTPP, Business Oregon will reimburse up to $5,000 or half of a company's expenses for a pre-approved strategic event. Section Type of Financing Eligibility Criteria Amount Other Details Global Strategies Grant - Reimbursements Companies must meet all of the following criteria: employ fewer than 500 individuals; at least 75% of applicant's employees located in Oregon; exhibit services or samples of Oregon products; and commit at least one full-time employee or sales agent for participation. Up to 50% of a company's eligible expenses up to $5,000 per event Program funds limited to the following: three trade events per state fiscal biennium; participation in the same trade show not allowed in consecutive years; participation in the same trade show a maximum of two times; and one trade show in a specific country per state fiscal year. State Trade and Export Promotion (STEP) The Oregon STEP Program assists Oregon small businesses looking to start or grow exporting products. STEP provides grants, funded in part by the U.S. Small Business Administration, to help companies promote and sell their products overseas. Section Type of Financing Eligibility Criteria Global Strategies Grant Reimbursements STEP Grants are awarded to eligible small businesses that meet the U.S. SBA's definition and can self-certify their eligibility. Other qualifying criteria: candidates must fit industries identified for export promotion assistance; at least 75% of the applicant s employees must be employed in Oregon; goods or services to be exported must be Oregon products; and company representatives must be full-time, U.S.-based employees. Amount Other Details Up to 50% of a company's eligible expenses up to $5,000 per event Most export training and development activities are supported by Oregon STEP, though specific programs of activity must be developed in consultation with a STEP trade specialist. Benchmarking State Business Capital Programs 14

15 Brownfields Redevelopment Fund (BRF) The Brownfields Program assists individuals, non-profit organizations and local governments with financing to evaluate, cleanup and redevelop brownfields. BRF provides loans funded by proceeds from the sale of state revenue bonds. Rates, terms and structuring requirements vary. Section Type of Financing Eligibility Criteria Amount Rates Terms Business Finance Direct loans and grants are available, although the fund is primarily used for loans. Any individual, business, non-profit organization, prospective purchaser, municipality, special district, port or tribe may apply. The financing is to be used for evaluating, cleaning up and redeveloping brownfields. Unspecified Unspecified 20-year term Figure 7. BRF Loan and Grant Amounts, Benchmarking State Business Capital Programs 15

16 Business Retention Program (BRS) The Oregon BRS offers consulting services to Oregon companies facing difficult times. The program matches some of the best and most experienced private sector consultants in the state with a company based on specific needs and industry requirements. Section Type of Financing Eligibility Criteria Amount Rates Terms Business Finance Grants or no-interest loans for consulting services Any Oregon companies facing difficult times, though priority is given to those in key industries or distressed areas $15,000 max for consulting services and $30,000 max for feasibility studies Zero-interest Unspecified Benchmarking State Business Capital Programs 16

17 Strategic Reserve Fund (SRF) The Oregon Legislative Assembly established the SRF to support economic development in Oregon. Funds are used to assist projects of public entities, industry groups or businesses with broad impacts, to provide interim financing in support of public or private sector programs, or to analyze significant economic issues and opportunities. Particular emphasis is placed on cost-effective projects that support traded-sector industries throughout the state. Section Type of Financing Eligibility Criteria Amount Other Details N/A Grant Finances economic and community development projects that: Are expected to result in new jobs, job retention, or higher incomes; Provide assistance to businesses that are considering starting in, expanding in, or relocating to Oregon; Catalyze economic and community development benefits, or Result in improved utilization of existing Oregon resources. Unspecified Funds will not be used to assist: Relocation of a business from one part of the state to another, except for businesses that would otherwise relocate outside Oregon; The retirement or service of debt for any public or private entity; or The Department with any administrative expenses. Figure 8. SRF Loans and Amount, Benchmarking State Business Capital Programs 17

18 Program Performance Benchmarks Loss Rate Economic development loan funds are expected to address business and project finance that is ineligible for commercial financing. These programs should therefore expect higher losses than commercial lending in fact, programs arguably should experience higher losses. In order to assess the loss rate of Business Oregon s finance programs, this analysis utilizes summary data on each program s portfolio. Because of differences in the programs and the management of each portfolio, the loan loss data is analyzed separately for each program. 2 OBDF has a very low loss rate. The program reports cumulative losses of $646,800 against total assets of $41.0 million. Losses are therefore just 1.6 percent of assets. Historically, losses only exceeded two percent in This is a low rate, particularly for an economic development lending program. OBDF is making some combination of lower risk loans and servicing the loans with a high degree of attention, which enables eventual recapture, even from troubled borrowers. Reflecting the earlier-stage focus of the program, losses for EDLF have been high. The program has experienced cumulative losses of $406,300 compared to total assets of $3.1 million. This is a total loss rate of 13.0 percent. Already high, this rate has been substantially lowered due to the program reporting no losses since 2011 and additional infusions of capital increasing the assets from under $600,000 in 2011 to more than $3 million by In 2005 and 2008, EDLF experienced losses of one-fifth and onethird, respectively, of the program s assets at that time. The losses, while high, are not necessarily unexpected for a program that targets entrepreneurs and new companies. In fact, the program s lower than five percent annual losses in every year since 2009 appears to suggest a risk-averse change in underwriting that may not be in line with EDLF s purpose. Over the life of the program, CEF has an almost negligible loss rate. The program has cumulative losses of $573,000 since 2004, although this includes more than $636,000 in recoveries made since Due to the nature of CEF, losses are compared against guaranties made instead of total assets. The program s overall loss rate is half of a percent. The first two years of the review period saw higher loss rates (approximately six and four percent, respectively) for the program, but only one other year (2010) had losses above three percent. The other years of negligible losses and even gains through recoveries has resulted in a fairly steady decrease in the cumulative loss rate for the program. CEF seems to be identifying projects that do not have much risk, and simply require public assistance to move the commercial lender forward with the loan. As a result, CEF is catalyzing millions in private lending while maintaining a quality asset. Data is not available to report asset-based losses for SRF. The program has written off five of the program s 213 loans provided since On a per-loan basis, 2.4 percent of SRF loans have experienced losses. The written-off loans had a value of $431,000 compared to a total of $41.3 million in program lending. While these figures ignore partial repayment that may have occurred, the loss rate on this basis is just one percent. SRF has an extremely low risk portfolio, and the loans that have gone bad were much smaller than the successful loans. 2 A by-program analysis of the loan loss data is particularly important because losses are not truly relevant to CAP or IDB (and are not included in the available data), and CEF reports substantial recoveries that would be difficult to interpret in a Department-wide analysis. Benchmarking State Business Capital Programs 18

19 Asset Quality A loan portfolio s asset quality is comprised of its real and potential credit risk. Because economic development finance programs target borrowers who are typically not ready for commercial lending, the credit quality of these loan funds is expected to be worse than a bank, or even a community lender s loan funds. The high risk associated with these programs is mitigated (at least in psychological, if not fiscal terms) by a collection of factors, including the economic impacts of the assisted projects, rates and fees charged by the programs, and service- and repayment-oriented assistance for struggling borrowers. The preceding subsection analyzed Business Oregon s losses over the last decade. This loss rate speaks to one of the key tangible factors affecting asset quality. With loss rates below two percent for two programs and at three percent for a third, the programs are adopting an amount of risk that is not tremendously higher than that seen by commercial banks for commercial loans. The Federal Reserve reports that charge-offs in the second quarter of 2014 were just 0.10 percent. 3 However, the figures above were cumulative, and commercial banks charge-offs were above two percent for nearly all of 2009 and This suggests that Business Oregon s loan funds have high quality assets. The Federal Deposit Insurance Corporation (FDIC) identifies additional factors in assessing a loan fund s asset quality. 4 These factors include the adequacy of Business Oregon s: Underwriting standards; Risk identification practices; Available loan fund reserves; Diversification of the loan portfolio; Loan policies and procedures; and Internal controls and information systems. Some of the asset quality factors identified by the FDIC are not readily measurable. However, there is data on risk identification practices for EDLF and OBDF, available loan fund reserves and diversification of the loan portfolio. These factors, coupled with the loan loss analysis, can provide a relatively complete picture of Oregon business finance programs asset quality. Business Oregon evaluates loan risk ratings for three programs CEF, EDLF and OBDF. All EDLF loans and the majority of OBDF loans since 2004 have received a rating, while less than five percent of CEF loans have been risk rated. Slightly different scales are used across the programs, although all scales have a root in the traditional five-point scale where 1 is successful and 5 is defaulting. According to this system, just 2.6 percent of all loans (and eight percent of risk-rated loans) among these three programs have been rated as a 4 or 5, which indicates a clear problem. More than three-quarters of rated loans received the highest rating. Loan funds, as well as banks, must keep reserves on hand in order to be able to remain operational in the case of losses. Economic development loan funds do not necessarily have a requirement for the reserves they must have on hand. The Federal Reserve requires depository institutions to maintain 3 Federal Reserve. (2014). Charge-Off and Delinquency Rates on Loans and Leases at Commercial Banks. Retrieved 8/2014 from: 4 Federal Deposit Insurance Company. (2012). Asset Quality. RMS Manual of Examination Policies. Retrieved 8/2014 from: Benchmarking State Business Capital Programs 19

20 reserves of just three percent. 5 Perhaps more comparably, the U.S. Small Business Administration Microloan program requires participants to maintain a loan loss reserve fund of 15 percent. 6 Business Oregon has figures available to compare outstanding loans against total assets for EDLF and OBDF. 7 Both programs are well above either minimum loan loss reserve threshold. EDLF was only below 15 percent reserves in one year and is currently closer to one-third. OBDF has never dipped below a quarter and currently only has loans receivable equal to 41 percent of total assets. Both programs have ample capability to conduct additional lending. The diversity of Business Oregon s loan portfolio is impressive. Detailed breakouts of this diversity are available in the following subsections. In terms of geographic coverage, loans are dispersed throughout the state s counties and geographic types. More lending occurs in urban areas, but rural areas appear to be disproportionately represented on a per capita basis. Similarly, loans cover a wide range of NAICS, albeit with some concentration in manufacturing. This diversity will help to secure Business Oregon s overall portfolios should an economic catastrophe affect isolated areas of the state or its economy. Overall, Oregon s business finance programs have impressive asset quality. On the FDIC s five-point scale, 8 the programs would likely rate a 1. This score reflects strong asset quality and credit administration with few overall risks. This rating is justified because of moderate-low loss rates, high reserves and aggressive management of potential problems. This scoring is particularly strong if grading on the scale of economic development lending funds Leveraged Private Investment One of the key measures of business finance programs is the extent to which public funds are used to catalyze additional private investment in projects. From a public policy perspective, the best use of public dollars occurs when the private investment would not happen at least not to the same scale without the program s participation. Measures of private leverage are important contributors to the overall economic development impact of the public program. The program data provided by Business Oregon provides two measures of private investment: equity and outside financing. Equity is capital provided by the developer. Outside financing from private sources includes commercial lending. The analysis below is based on the sum of the equity and private outside financing figures. 9 5 Federal Reserve. (2014). Reserve Requirements. Retrieved 8/2014 from: 6 U.S. Small Business Administration. (2014). SBA Microloan Program: Loan Side Basics. Retrieved 8/2014 from: 7 Data are not precisely relevant for CAP, CEF and IDB, as these programs do not directly make loans through Business Oregon. Data is not available for SRF. 8 Federal Deposit Insurance Company. (2012). Asset Quality. RMS Manual of Examination Policies. Retrieved 8/2014 from: 9 It is important to note that the equity and outside financing fields are not required components of all Business Oregon financing applications, and these figures therefore likely underreport the full value of private investment catalyzed by the programs. Benchmarking State Business Capital Programs 20

21 Table 2. Private Investment per Dollars Loaned by Oregon Business Finance Program, Program Loan Year Total CAP $0.00 $0.00 $0.02 $0.00 $0.00 $0.00 $0.03 $0.00 $0.34 $1.43 $0.07 $0.12 CEF $0.01 $0.00 $0.06 $0.04 $0.05 $0.14 $0.01 $0.06 $0.06 $0.17 $0.07 $0.08 EDLF $0.23 $1.31 $0.71 N/A $0.99 $2.17 $0.80 $1.13 $1.05 $0.91 $0.20 $1.02 IDB $0.00 $0.00 $0.07 $0.38 $0.06 $0.08 $0.00 $0.00 $0.85 $0.05 N/A $0.09 OBDF $0.88 $0.87 $2.93 $1.99 $2.16 $2.49 $3.17 $20.53 $2.17 $1.93 $1.38 $3.69 Total $0.20 $0.16 $0.48 $0.41 $0.53 $0.68 $0.13 $2.32 $0.40 $0.29 $0.23 $0.42 Figure 9. Private Investment per Dollars Loaned by Oregon Business Finance Program, The analysis reveals that Business Oregon s finance program yield 42 cents in private investment for every dollar of public lending. This ratio reflects the fact that most of Oregon s programs are designed as direct lending programs, with the state supporting projects that provide economic benefits but are not able to meet commercial underwriting standards. On a program-by-program basis, OBDF sees the greatest private investment. Over the timespan covered in this project, the program returns $3.69 for every dollar of program funds. This value is driven by a significant outlier in 2011, but the program nonetheless provides the strongest catalyst, in terms of dollars invested, of the state s business finance programs. Benchmarking State Business Capital Programs 21

22 The figures provided in this section may not accurately reflect the true level of private investment catalyzed by Business Oregon lending programs. One reason is that potential borrowers may not be required to report their equity or outside financing as part of the application process, leading to significant underreporting. Additionally, the CEF and IDB programs are already leveraging private investment by definition, which does not appear to be taken into account by Business Oregon s data. CEF is a guarantee program meaning that every program dollar is backing no less than $1.2 in commercial lending. The IDB program provides no direct funding to borrowers, as the loan itself is leveraged from private investors primarily through a federal tax exemption. Taking these factors into account would significantly boost the private investment reported here. The SRF program appears to have a more thorough measure of private investment. Since the start of 2004, the program reports $2.3 billion in private investment on projects receiving just $43.1 million in financial support through the program. This is an overall leverage ratio of $ Annual leverage ratios do not reveal any strong trend, with values ranging from a low of $10.08 to a high of $ Figure 10. Private Investment per Dollars Loaned by Oregon SRF, Job Creation & Retention Another key measure of business finance programs is the extent to which loans can contribute to the creation or retention of jobs. During the recent recession, Oregon s unemployment rate increased from just five percent in early 2008 to over 11 percent for much of That rate has decreased steadily and been near or below seven percent in Despite this improvement, job creation and retention remain critical goals for the ongoing economic development of the state. Business Oregon collects two measures of employment leveraged through its business finance programs. These are job creation and job retention. Creation refers to new jobs that are generated through the launch or expansion of a business. Retention reports jobs that are preserved in the state 10 U.S. Bureau of Labor Statistics. (2014). Oregon, Unemployment Rate. Retrieved 8/2014 from Benchmarking State Business Capital Programs 22

23 because a business is able to access capital that it needs in order to remain viable and in Oregon. Both measures, as reported here, are based on figures provided at the time of application. Table 3. Jobs Created (Cre.) and Jobs Retained (Ret.) by Oregon Business Finance Program, Loan Program Total Job Loan CAP CEF EDLF IDB OBDF Creatioention Ret- Year Cre. Ret. Cre. Ret. Cre. Ret. Cre. Ret. Cre. Ret Total 914 1,519 2,106 2, ,405 1,619 6,131 5,272 Business Oregon lending programs contributed to the creation of 6,131 jobs and retained another 5,272 jobs in the state since The greatest number of jobs were created in 2012, but and 2013 were also strong years for job support through the business finance programs. These same years that Business Oregon reports creating the most jobs through its programs match the years in which the state moved from an unemployment rate exceeding 11 percent to back below seven percent. Myriad factors certainly contributed to this improvement, but the business finance programs provided key support. On a program level, OBDF and CEF create and retain the most jobs of the five business finance programs. At the beginning of the review period, OBDF was the primary job creation lending program for the state. However, a trend beginning in 2009 and becoming clearer in 2011 was the rise of CEF as Oregon s business finance program that creates the most jobs. This change is particularly noteworthy because of the different approaches of the two programs: OBDF is a direct lending program while CEF guarantees loans made by commercial banks. Also noteworthy at the program level is that CAP is the only program that retains more jobs than it creates likely reflecting the program s emphasis on working capital over expansion projects. Benchmarking State Business Capital Programs 23

24 Figure 11. Total Jobs Created or Retained by Oregon Business Finance Program, The SRF has been a major job creator for Oregon. This program counts jobs separately from the other business finance programs and records actual jobs at the end of the project. The data, which is available through 2012, shows that the program has created an average of 106 jobs per project since This number has declined significantly since 2005, but SRF still remains one of the strongest jobcreation finance tools for Oregon. Figure 12. Actual Jobs Supported by Oregon SRF, Actual job data not available for 2013 or Benchmarking State Business Capital Programs 24

25 Business Oregon is not simply focused on creating and retaining jobs in a vacuum. The Department places an emphasis on creating high quality jobs. In the absence of wage data, borrower industry is a significant factor in the economic impact of employment. Jobs created in manufacturing and professional services have greater overall impacts. Agricultural and retail jobs have less overall impact on the Oregon economy. Table 4 displays job creation by several key industries to better-demonstrate the overall impact of Oregon business finance programs. Table 4. Reported and Adjusted Total Jobs from Business Oregon Programs for Most Popular NAICS, NAICS Description Loans Total Jobs Rank Industry Multiplier Adjusted Jobs Adjusted Rank Wood cabinet manufacturing , Help supply services Chemical milling job shops Acoustical engineering services Breakfast bar manufacturing Plywood manufacturing Cutting and transporting timber Bulk mail truck transportation Agricultural property leasing Blanks, wood manufacturing App. programming services Bagel shops Meat butchering Coffee manufacturing Plant construction Bag manufacturing Ale brewing Dental manufacturing Carryout restaurants Aircraft carrier manufacturing Table 4 includes those NAICS in which Business Oregon programs reported creating or retaining at least 100 jobs over the review period. One takeaway from the analysis is that the state gains tremendous leverage from food manufacturing coffee, ale and breakfast bars perform particularly well once considering the industry multiplier. Conversely, jobs related to forestry and wood products underperform when adjusting for industry multiplier. Of course, this approach to measuring the programs impact on Oregon jobs is imprecise. Other factors, such as the existing skills of the workforce and location, are important factors influencing the true local impact of a specific business expansion project. Benchmarking State Business Capital Programs 25

26 Table 5. Reported Total Jobs and Location Score from Business Oregon Programs by County, County 2010 Pop. (000s) Total Jobs Location Score County 2010 Pop. (000s) Total Jobs Location Score Baker Lane , Benton Lincoln Clackamas Linn Clatsop Malheur Columbia Marion , Coos Morrow Crook Multnomah , Deschutes Polk Douglas Tillamook Grant Umatilla Harney Union Hood River Wallowa Jackson Wasco Jefferson Washington Josephine Wheeler Klamath Yamhill Lake Oregon 3, , Table 5 and Figure 13 provide total job creation and retention data for Oregon s business finance program by county over the entire review period. The location score is an index of the number of jobs created in each county relative to population. 12 A negative number means that the programs supported fewer jobs relative to population than might have been expected, and a positive score means the reverse. Of the nine counties with a positive location score, only Marion County has a population above 100,000. Grant County s 334 jobs against a population of just 7,500 is certainly a factor in the imbalanced scoring, but removing Grant only adds one more county (Lane) to join Marion as a positivescore, high-population county. The location score clearly shows that low-population counties are relatively well-served by Business Oregon s job support efforts. 12 Specifically, the location score is the Z-Score (standardized value) of the total jobs created or retained in each county divided by county population. Note that while Oregon was assigned a Location Score, the state-level job and population were not used in the calculation of the standardized scale. Benchmarking State Business Capital Programs 26

27 Figure 13. Location Score for Oregon Business Financing Programs by County, Geographic Coverage Business Oregon is a state-level entity that is meant to provide business finance services throughout the state. Counties provide an effective means of representing geographic coverage, and the analyses below focus on the assisted project s county. Oregon is divided into 36 counties. County sizes are generally smaller in the Northwest corner of the state and larger in the Southeast. Population ranges from 1,400 (Wheeler) to 742,000 (Multnomah). As discussed in the preceding section, the lending programs are doing excellently in terms of supporting employment in a wide variety of counties. Similar distributions appear to be at play for the number and amount of loans, as well as private leverage. Figures for CAP, CEF, EDLF, IDB and OBDF are in Table 2, and SRF is available in Figure 10. On the whole, the state s business finance programs are lending approximately $119 per person since More loans and greater funds are sent to higher-population counties. However, lower population areas are, on a per capita basis, well-represented. Even Wheeler County, with just one loan, is above this average. Meanwhile, Multnomah County is close to $70 per person. These are anecdotal results by themselves, and contradictions (such as Washington County s $308 rate) exist. The SRF s distribution is slightly different, as its loans appear relatively concentrated in fewer counties. Further, the counties targeted by SRF loans are on the higher end of the population scale for the state. Urban and rural coverage is assessed in the next subsection in more detail. On the question of pure geographic distribution, Business Oregon appears to provide diverse coverage through its programs. 13 Clatsop (1.19) and Grant (5.28) counties have scores above the scale of the figure and are not pictured. Benchmarking State Business Capital Programs 27

28 Table 6. Oregon Business Finance Program Loans, Amount and Leverage by Project County, County Loans Loan Amount (000s) Private Leverage (000s) County Loans Loan Amount (000s) Private Leverage (000s) Baker 17 $2,621 $1,845 Lane 233 $52,118 $32,626 Benton 9 $1,280 $103 Lincoln 13 $580 $15 Clackamas 58 $10,274 $4,226 Linn 17 $3,821 $4,309 Clatsop 200 $13,896 $131 Malheur 8 $2,675 $243 Columbia 9 $3,100 $674 Marion 137 $22,095 $8,642 Coos 36 $8,596 $75,510 Morrow 9 $5,310 $0 Crook 37 $8,355 $1,231 Multnomah 168 $52,111 $23,968 Deschutes 88 $25,466 $10,343 Polk 21 $7,483 $1,069 Douglas 34 $4,900 $1,013 Tillamook 13 $1,800 $95 Grant 14 $5,682 $7,354 Umatilla 40 $14,685 $1,214 Harney 6 $334 $12 Union 23 $6,584 $1,936 Hood River 8 $2,201 $1,903 Wallowa 17 $3,843 $680 Jackson 35 $15,347 $4,286 Wasco 5 $715 $1,280 Jefferson 1 $250 $0 Washington 113 $165,258 $9,514 Josephine 13 $1,781 $444 Wheeler 1 $141 $50 Klamath 22 $3,429 $1,493 Yamhill 33 $14,115 $3,502 Lake 5 $135 $150 Oregon 1,443 $460,981 $199,863 The geographic distribution of private leverage does not appear to be quite as even as lending and job support. Six counties received less than $100,000 in leverage while seven benefited from more than $5 million. At least two reasonable explanations for this wide variation exist. First, because private leverage is not a necessarily required measure from Business Oregon, staff conducting data entry may more thoroughly record this measure in some counties than in other counties. Second, projects may be either larger or more capable of finding additional, private financing in some counties than in other counties. Either, or both, explanations would clarify the disproportionate private leverage recorded for the state s lending programs. Benchmarking State Business Capital Programs 28

29 Table 7. Oregon SRF Loans, Leverage and Total Jobs by Project County, County Projects Private Leverage (000s) Actual Jobs County Projects Private Leverage (000s) Actual Jobs Baker 1 $ Lincoln 5 $40 0 Benton 3 $3,500 0 Linn 8 $0 1,161 Clackamas 14 $700 1,556 Malheur 3 $ Clatsop 5 $0 20 Marion 20 $113,235 1,520 Columbia 2 $68,975 0 Morrow 4 $ Coos 8 $21, Multnomah 30 $5,650 4,852 Crook 1 $40,600 0 Polk 1 $10, Curry 6 $1,540 0 Roseburg 1 $9,393 0 Deschutes 13 $0 1,398 Tillamook 6 $5, Douglas 8 $29, Umatilla 13 $106, Grant 1 $150 0 Union 3 $1, Harney 4 $1,416 8 Wallowa 3 $0 0 Hood River 4 $0 28 Wasco 2 $113, Jackson 9 $2,660 1,173 Washington 18 $4,582 4,622 Josephine 6 $ Wheeler 1 $163,689 0 Klamath 2 $111, Yamhill 11 $21, Lane 20 $52,955 4,384 Statewide 18 $293, Lake 1 $200 0 Oregon 255 $1,185,868 24,668 Benchmarking State Business Capital Programs 29

30 Figure 14. Oregon Business Finance Program Lending Amount by Project County, An industry-level analysis provides another source of investigating Business Oregon s geographic coverage. Of course, the concentration of industries is an important factor for interpreting this analysis. If industries are evenly distributed throughout the state, then county-to-county differences may be due to either (a) differing financial needs across the counties or (b) differing program policies. However, if industries are clustered into specific counties, a more likely circumstance, then county-to-county differences may be a natural response to local variation. Benchmarking State Business Capital Programs 30

31 Figure X shows industry lending support by county. Manufacturing (31-33) is the most-supported industry in most counties (with Clatsop as a notable exception). Wholesale retail (42) is particularly strong in Crook County and limited in all others, except Lane County. Distribution and Transportation (48-49) are largely present only in a small handful of counties. Figure 15. Oregon Business Finance Program Loans by 2-digit NAICS and Project County, Benchmarking State Business Capital Programs 31

32 Urban & Rural Coverage A component of diverse coverage through the state is the extent to which Business Oregon supports lending in both urban and rural communities. The figures reveal that more loans are made to rural areas, but a higher dollar amount, as well as greater private leverage and total jobs occur in urban areas. The difference in lending amount is largely driven by IDBs in urban areas, which is in turn largely driven by one, large (and taxable) project. Even accounting for this outlier, urban projects supported by Oregon business finance programs are clearly larger than rural projects. Table 8. Urban and Rural Loans, Amount, Leverage and Total Jobs by Program, Program CAP CEF EDLF IDB OBDF SRF 14 Total Urban or Rural? Loans Loan Amount (000s) Private Leverage (000s) Total Jobs Urban 181 $6,409 $2, Rural 225 $15,727 $ Urban 188 $58,327 $2,264 2,245 Rural 262 $83,754 $8,285 1,378 Both U / R 13 $4,375 $1, Urban 21 $576 $ Rural 20 $504 $ Both U / R 4 $99 $164 7 Urban 11 $187,455 $18, Rural 7 $16,804 $1, Urban 58 $16,333 $44,795 1,686 Rural 48 $13,532 $105,058 1,169 Both U / R 3 $744 $2, Urban 79 $20,163 $1,270,939 11,684 Rural 104 $12,489 $821,547 7,234 Both U / R 30 $8,668 $163,120 1,555 Urban 538 $289,263 $1,339,379 16,606 Rural 666 $142,810 $937,071 10,612 Both U / R 50 $13,885 $167,734 1, The SRF figures, although comparable, are measured according to different standards and requirements than the other Oregon business finance programs. Benchmarking State Business Capital Programs 32

33 Figure 16. Loans and Total Jobs by Oregon Business Finance Programs to Urban and Rural Areas, Benchmarking State Business Capital Programs 33

34 Distressed Area Coverage As part of supporting the state s economic development, Business Oregon gives special attention to economically distressed areas. The state s business finance lending programs clearly emphasize the distressed areas, with more loans, three times as much lending and as many jobs supported and six times as much private leverage going to these counties and cities. The proportion of lending support going to distressed areas has also grown over time, with relatively few loans going to projects in nondistressed areas since Table 9. Distressed and Non-Distressed Area Loans, Amount, Leverage and Total Jobs by Program, CAP CEF Program Distressed? Loans EDLF IDB OBDF Total Loan Amount (000s) Private Leverage (000s) Total Jobs Yes 142 $10,128 $ No 263 $11,966 $2, Yes 376 $114,774 $10,667 3,185 No 102 $34,336 $ Both 4 $1,509 $1, Yes 44 $1,129 $1, No 4 $115 $307 6 Yes 11 $175,559 $11, No 7 $28,700 $8, Yes 85 $23,458 $132,547 2,433 No 21 $5,968 $14, Both 4 $692 $2, Yes 658 $325,048 $156,276 6,462 No 397 $81,085 $25,453 1,926 Both 8 $2,201 $4, Benchmarking State Business Capital Programs 34

35 Figure 17. Loans and Total Jobs by Oregon Business Finance Programs to Distressed Areas, Benchmarking State Business Capital Programs 35

36 Program Use by Market Segments Business Oregon provides lending support to a wide variety of business types. As represented by the North American Industry Classification System (NAICS), loans have been made to 341 specific industries (six-digit level) across 21 industry categories (two-digit level). To assist with the clarity of the analysis, all results are discussed here in terms of industry category. The plurality of Oregon business finance program loans are made to businesses in the Manufacturing sector (31-33). Construction, Retail and Wholesale are the next most-assisted segments, although various service industries are well-represented as a whole. Mining, Finance and Insurance, and Educational Services have received very few loans from any of the programs. Utilities (22) and Public Administration (92) are the only industries not identified in the loan data, although a sampling of the unidentified loans clearly includes local governments, which would fall into Public Administration. Assessing any long-term trend from the state s lending history is complicated by the fact that the majority of industry-by-year breakouts have too few loans to facilitate interpretation. A cautious reading of the data suggests that Construction, Retail and Professional Services lending have become relatively more common for the state s programs in recent years. Assisting construction businesses as the state attempted to emerge from the recession makes a great deal of sense from a policy perspective. Within a few more years, a reassessment of the data will be able to clarify whether these apparent increases were real trends or statistical anomalies. Benchmarking State Business Capital Programs 36

37 Table 10. Oregon Business Finance Program Loans by Two-Digit NAICS Code, NAICS Loan Year Total Loans 11 Ag., Forestry Mining Construction Manufacturing Wholesale Retail Transportation & Warehousing Information Finance & Ins Real Estate Professional Administrative Educational Health Care Entertainment Food Services Other Services N/A or Other Total ,670 Analyzing loans per industry at the program level reveals that certain Business Oregon programs are much more commonly applied to some industries than others. IDB, OBDF and SRF are almost entirely used for manufacturing projects, with 234 of 347 combined loans occurring for businesses registered in this industry. The plurality of CEF projects are also in manufacturing, although not as exclusively. Construction and Wholesale industries are also well-supported by the program and the fact that CEF has seen a resurgence since 2010 lends credence to the apparent trend towards supporting financing for these industries over that same time. CAP is the most diverse of the lending programs, with four different industry categories each accounting for more than ten percent of the program s loans since Benchmarking State Business Capital Programs 37

38 2004. Without the broad focus of CAP, Business Oregon s programs would appear to be far more concentrated around manufacturing. Table 11. Loans and Total Jobs by Two-Digit NAICS Code and Oregon Business Finance Program, NAICS 11 Ag., Forestry 23 Construction Manufacturing 42 Wholesale Retail Transportation & Warehousing 54 Professional 56 Administrative 72 Food Services 81 Other Services Other NAICS Total Values Program CAP CEF EDLF IDB OBDF SRF 15 Total Loans Total Jobs ,036 Loans Total Jobs Loans Total Jobs 132 1, ,473 12,667 17,483 Loans Total Jobs ,223 Loans Total Jobs ,358 1,887 Loans Total Jobs Loans Total Jobs ,325 Loans Total Jobs ,492 2,198 Loans Total Jobs Loans Total Jobs Loans Total Jobs ,219 2,800 Loans ,210 Total Jobs 1,320 3, ,418 20,080 29, The SRF figures, although comparable, are measured according to different standards and requirements than the other Oregon business finance programs. Benchmarking State Business Capital Programs 38

39 Program Use by Core Industries The State of Oregon has identified five core industries that cut across multiple NAICS designations. These industries are Advanced Manufacturing, Clean Technology, Forestry and Wood Products, High Technology and Outdoor Gear. Although Business Oregon must balance a host of credit- and impactbased factors when making lending decisions, supporting these core industries as part of bolstering the state s economy is an important consideration. Measuring the impact of Business Oregon lending to core industries is complicated by the fact that the designations do cross NAICS. In the absence of a clear classification system, a reliable and manageable method of measuring the impact does not exist. However, Business Oregon does use a free-text item that enables staff to describe the nature of a business. This information is available for just over 700 loans made through business finance programs since The core industry analysis used these descriptions to assign loans to a core industry, if applicable. Figure 18. Oregon Business Finance Program Loans by Core Industry, Nearly one-third of the available loans could be categorized into one of the state s five core industries. Lending to the industries has varied over time, but Advanced Manufacturing and Forestry and Wood Products have consistently been among the best-supported. Given High Technology s tendency to favor small companies, Outdoor Gear s emphasis on retail, and the relatively recent rise of Clean Technology as a stable industry, the less-frequent support for the other core industries is hardly surprising. Benchmarking State Business Capital Programs 39

40 Figure 19. Loans by Oregon Business Finance Program and Core Industry, A program-level analysis of core industry lending clearly shows that CEF provides the most loans to these industries. Two-thirds of the core industry loans in this analysis were made through CEF, although this program is used most often overall. As a portion of total loans made, IDB and OBDF also provided strong support to the core industries. With the exception of one outlier project categorized as High Technology, the figures for loan amount appear to track the loan data well. Forestry and Wood Products received the greatest amount of lending (again, apart from the outlier project), but Advanced Manufacturing has also been well-supported. Table 12 also shows that lending to Clean Technology has been very strong in three of the last four years, and this is only likely to continue as the industry continues to mature. Benchmarking State Business Capital Programs 40

41 Table 12. Oregon Business Finance Program Loan Amounts in Thousands of Dollars by Core Industry, Loan Year Advanced Mfg. Clean Technology Forestry & Wood Industry High Technology Outdoor Gear Other Industries Total 2004 $2,915 $0 $1,468 $1,750 $100 $17,840 $24, $3,911 $0 $4,885 $362 $150 $15,682 $24, $4,023 $28 $954 $0 $150 $23,404 $28, $843 $60 $6,522 $0 $150 $30,817 $38, $1,090 $0 $2,067 $0 $160 $16,461 $19, $3,275 $154 $480 $350 $0 $14,473 $18, $2,453 $151 $909 $141,855 $0 $19,994 $165, $3,558 $1,024 $8,156 $747 $35 $20,740 $34, $1,250 $400 $1,097 $482 $0 $36,971 $40, $2,404 $4,556 $11,255 $0 $0 $47,693 $65, $692 $1,165 $1,050 $0 $183 $12,231 $15,321 Total $26,415 $7,537 $38,841 $145,546 $928 $256,307 $475,574 Benchmarking State Business Capital Programs 41

42 Program Evaluation Matrix Program Strategic Objectives Financing Criteria Project Outcomes Market Gaps CAP Available to all types of businesses and for any purpose. Banks underwrite and service the loans. Type: Credit Enhancement Amount: $35K reserve Rates: Set by lender Terms: Set by lender Loans & Amounts: 619; $33M Private Leverage: $0.12 Total Jobs: 914 (C); 1,519 (R) Geographic Coverage: 19 counties; Leans Rural Markets Reached: Most Markets Not Reached: Administrative Services, High Technology CEF Available to all types of businesses and for any purpose. Banks underwrite and service the loans. Type: Credit Enhancement Amount: $2M / $1.5M LOC Rates: % Terms: 5 yrs. Loans & Amounts: 557; $174M Private Leverage: $0.08 Total Jobs: 2,106 (C); 2,019 (R) Geographic Coverage: 32 counties; Leans Rural Markets Reached: Manufacturing, Construction, Wholesale Markets Not Reached: Transportation, Forestry EDLF Targets new, small businesses (revenues under $500K) in any industry. Counseling required. Type: Direct Loan Amount: $50K (initial) / $70K Rates: Prime +2% Terms: 5 years Loans & Amounts: 87; $2M Private Leverage: $1.02 Total Jobs: 141 (C); 17 (R) Geographic Coverage: 25 counties; Both Urban/Rural Markets Reached: Manufacturing, Retail, Food Markets Not Reached: Services Industries, Forestry, Clean and High Technology IDB Issues federally tax-exempt bonds for qualified manufacturing or solid waste projects. Taxable bonds for others. Type: Bonds Amount: $10M (Mfg.) / None Rates: 1-2% below market Terms: 1.2x life of assets Loans & Amounts: 21; $223M Private Leverage: $0.09 Total Jobs: 565 (C); 98 (R) Geographic Coverage: 11 counties; Primarily Urban Markets Reached: Manufacturing Markets Not Reached: N/A (program for small manufacturers only) OBDF Manufacturing and distribution industries. Particularly targeted at distressed areas. Type: Direct Loan Amount: Up to $1M Rates: Treas. +1% / Prime -4% Terms: 20 yrs / 5 yrs Loans & Amounts: 173; $43M Private Leverage: $3.69 Total Jobs: 2,405 (C); 1,619 (R) Geographic Coverage: 28 counties; Leans Urban Markets Reached: Manufacturing Markets Not Reached: Service Industries, Forestry SRF Legislative program assisting wide range of high-impact projects. Type: Grant Amount: No limit Rates: N/A Terms: N/A Loans & Amounts: 213; $41M Private Leverage: $54.59 Total Jobs: 22,123 Geographic Coverage: 34 counties; Both Urban/Rural Markets Reached: Manufacturing Markets Not Reached: Service Industries, Construction; Transportation Benchmarking State Business Capital Programs 42

43 Benchmarking State Business Capital Programs Section A: Portfolio Analysis Section B: Demand / Supply Match Analysis Section C: Alternative Coverage Assessment Section D: Recommendations Benchmarking State Business Capital Programs 43

44 Business Oregon Loan Programs, Mission & Strategies Effective organizations not only have a mission, vision and strategy, but these statements are also referenced regularly by the organization. A mission and vision provides a scope against which all programs and operations should be judged activities that do not fall within this scope do not merit the investment of limited resources. A strategy should provide a more detailed guide of how the organization operates as it works to fulfill its mission and vision. Business Oregon is one of the most respected development finance organizations in the country. The Department has clear mission and vision statements and a concise strategy to guide the organization. This section assesses the degree to which Oregon s business finance programs are in accordance with these statements. Mission & Vision Business Oregon s mission and vision statements, which can be found in the sidebar to the right, clearly assign the organization with the task of improving the state s economy. The vision addresses this goal broadly, speaking to innovation, sustainability and quality of life. The mission more specifically states that Business Oregon will grow businesses, leverage funding and support quality jobs. The business finance programs all clearly fit within Business Oregon s mission and vision. Each program is geared toward supporting business growth by facilitating access to capital. CAP, CEF and IDB are specifically structured to catalyze private lending, and the SRF program also achieves a sizeable ratio of private-to-public leverage. CEF, OBDF and SRF each supported thousands of jobs within the state. The innovation and entrepreneurial support aspects of the mission and vision are addressed through EDLF and investments in the high tech core industry. The global competition aspect of the vision statement is supported generally by all programs interest in assisting companies with traded goods, and specifically by OTPP s and STEP s assistance for businesses targeting new, overseas markets. Sustainability is specifically addressed by BRF s attention to site remediation and redevelopment, as well as by programs support of Clean Tech businesses. Collectively, as well as individually, Business Oregon s programs are in line with the organization s identified scope. Mission Business Oregon works to create, retain, expand and attract businesses that provide sustainable, livingwage jobs for Oregonians through public-private partnerships, leveraged funding and support of economic opportunities for Oregon companies and entrepreneurs. Vision MISSION, VISION & STRATEGY A globally-competitive economy based on innovation, sustainable production, and world-class talent that creates familywage jobs and preserves and enhances the quality of life for Oregonians. Strategy Business Oregon carries out its mission with a focus on outcomes, not programs, driven by six themes: Innovation & Entrepreneurship Talent Access to Capital Global Trade Infrastructure Business Development Benchmarking State Business Capital Programs 44

45 Strategy Business Oregon s strategy is focused on helping the organization fulfill its mission and vision. The Department orients its strategy toward outcomes, rather than programs. This approach mirrors the mission and vision statements attention to economy, wages, leverage all of which are outcomes. Under this guidance, Business Oregon s programs align with its strategy to the extent that they help achieve desired outcomes. The strategy identifies six core themes, which can be viewed in the sidebar on page 44, in order to assist the Department with its evaluation. Business Oregon s finance programs can be seen to clearly fit within most of these strategic themes. Innovation & Entrepreneurship States throughout the country are increasingly recognizing local innovation and entrepreneurship as critical components to long-term economic opportunity. This strategic theme is consistent with Oregon s desire to cultivate a competitive economy based on innovation 16 and economic opportunities for Oregon entrepreneurs. 17 While innovation and entrepreneurship are key to Business Oregon as a whole, the Oregon Innovation Council provides the bulk of the Department s support to this sector. Business Finance, the division of Business Oregon analyzed by this report, is primarily targeted to laterstage business development and expansion. Nonetheless, several of the programs analyzed here support the strategic theme. EDLF is the primary Oregon business finance program for assisting new businesses and entrepreneurs. In terms of outcomes, EDLF provided loans to more than 550 Oregon firms from With a relatively low limit on loan amounts ($50,000) and affordable rates (two percent above prime), the program can greatly assist eligible businesses in achieving capital access. EDLF also requires that applicants enroll in a counseling program, helping to ensure that the beneficiaries are able to grow and mature as well as pay back the state loan. Other business finance support for the innovation and entrepreneurship strategic theme can be seen in the award choices of several additional programs. CAP is an effective tool for leveraging small business lending, and entrepreneurs who nearly qualify for commercial lending may receive critical assistance through CAP. The CEF, IDB and OBDF programs have all assisted businesses that rely upon innovation to succeed. More specifically, each of these programs has provided financial assistance to projects in the advanced manufacturing and high technology core industries. Despite the fact that this theme is not a focal point of Business Finance, the division has nonetheless significantly supported Business Oregon s economic development strategy. Access to Capital Expanding businesses and creating living-wage jobs requires capital. Business Oregon has therefore appropriately recognized access to capital as an important strategic theme toward achieving the Department s mission and vision. Oregon business finance programs facilitate access to capital for a variety of state businesses and projects exceptionally well. 16 From the Business Oregon vision, available in the sidebar on page From the Business Oregon mission statement, available in the sidebar on page 44. Benchmarking State Business Capital Programs 45

46 The programs, including CAP, CEF, EDLF, IDB, OBDF and SRF, facilitate capital access for businesses and projects. In many cases, applicants have sought traditional commercial lending but were turned down. A rejection from a bank does not necessarily mean that the desired loan was bad a company could be too new, have too little in collateral, or even need too little money to find a willing lender. In the absence of economic development loan funds, these businesses would not be able to acquire the financing they need to go forward. Business Oregon smartly provides a variety of business finance programs so that whether the project needs direct funding, additional funding, or credit enhancement, the Department has a tool capable of providing capital access. The effectiveness of these programs is demonstrated by the outcomes. Collectively, these programs provided loans and grants to 1,670 firms and projects from In addition to needing the literal access to capital, businesses often need low financing costs in order to have practical access to capital. Oregon business finance programs help on this front as well. Interest rates for BRF, IDB, targeted OBDF and SRF are lower than market rates. These programs therefore provide the lowest-cost capital that a business could reasonably expect to achieve. The capital is therefore not only available, but also affordable for the project in question. Global Trade The strategic theme of global trade is important to Business Oregon s vision of a globally-competitive economy 18 for the state. Access to international markets provides businesses with potentially important sales opportunities, which can, in turn, lead to opportunities for employment and growth. The Department provides several programs to help businesses with global markets. OTPP and STEP are designed to help businesses realize potential sales opportunities. With the support of these programs, Oregon businesses can participate in international trade shows without bearing the full cost of these events. These programs therefore enable businesses to be more aggressive in seeking opportunities for global trade. For the most recent program cycles, OTPP and STEP have assisted in the development of more than 6,000 sales leads and nearly $10 million in actual sales. Oregon business finance programs also provide substantial indirect support for global trade. Advanced manufacturing, forestry and wood products and outdoor gear are among Oregon s largest export sectors. 19 Manufacturing is the most-supported industry by the Department s programs, and the other industries receive significant assistance as well. There can be little doubt that many of the firms supported by these programs are directly or indirectly involved in the exporting of Oregon goods and services to global markets. Business Development Supporting the growth of existing, in-state businesses is often the most efficient means to enhancing a state s economy. Business Oregon s theme of business development therefore broadly supports the Department s mission and vision. As local companies improve sales, expand operations, hire workers and raise wages, the state will achieve an economy that enhances the quality of life for Oregonians From the Business Oregon vision. 19 U.S. Census Bureau. (2014). Foreign Trade: State by 6-Digit HS Code and Top Countries. Retrieved 9/2014 from: 20 From the Business Oregon vision. Benchmarking State Business Capital Programs 46

47 Oregon business finance programs are consistent with the business development theme in many ways. OTPP and STEP help businesses looking to expand their sales to overseas markets. BRS provides assistance to improve companies stability, thereby setting the stage for future recovery and growth. The financing programs are largely focused on providing capital access for business expansion projects. Each of these activities supports different facets of business development. Business Oregon s programs also help to emphasize good business development policy. Selected projects have helped to grow the economy significantly, catalyzing nearly $2.5 billion in private capital and creating or retaining 33,500 jobs from The Department has gained additional leverage from the placement of these investments and jobs. The majority of firms receiving assistance from Oregon business finance programs have been in the manufacturing sector, and jobs created in this industry tend to be relatively good-paying jobs. Furthermore, the projects have heavily emphasized parts of the state that need the investment most, with approximately 63 percent of loans and grants from occurring in economically distressed areas. Through these selections, Business Oregon s programs achieve particularly meaningful business development outcomes for the state. Benchmarking State Business Capital Programs 47

48 Strong Programs with Strong Positions The Portfolio Analysis demonstrated that Business Oregon operates effective business finance programs. The lending programs are able to assist numerous businesses, leverage millions in private investment and help to create thousands of jobs for the state. Some of these loan funds are specifically targeted to a few key industries. Other funds are dispersed across multiple industries. In most cases, this broad or narrow market focus appears to be a conscious decision of program policy. The Department is interested in identifying programs that are able to become critical assets to the continued development of Oregon s economy. Because of Business Oregon s focus, most of the analyzed finance programs appear best-suited to claim such a position in the manufacturing sector. As was seen in the Portfolio Analysis, loans to manufacturing businesses account for the majority of loans by most Oregon business finance programs. The following discussion addresses the programs that may be capable of taking strong industry positions in manufacturing, as well as other sectors. Credit Enhancement Fund (CEF) CEF is a particularly strong program for business Oregon. The program has grown in popularity since The increase in program usage may be in part a result of the programs inclusion in the U.S. Department of Treasury s State Small Business Credit Initiative, which provided funding to bolster programs that facilitate small business access to capital. However, credit enhancement programs, such as CEF, have been increasingly important in a number of states since the recession. Aircraft company expands with credit enhancement. Credit enhancement programs have become critical because business lending has, in some ways, undergone significant changes in recent years. In the past, high rates were more likely to be a key barrier to a project achieving its capital needs. More recently, many states have seen that their businesses are not challenged by rates so much as by collateral shortfalls. These collateral challenges stem in part from regulatory changes and in part from a decline in equipment and real estate values. Credit enhancement helps to overcome collateral deficits and thereby facilitate commercial lending. Like many Oregon business finance programs, CEF has seen its greatest influence in the manufacturing sector (NAICS 31-33). This includes the state s core industry target of advanced manufacturing. Over the course of the review period the plurality of loans supported through CEF were made to manufacturing businesses. Certainly, the program is well-positioned to achieve a strong position in this industry. The role that CEF plays in supporting two additional markets is also worth considering in this same context. Although not to the degree seen for manufacturers, the program supports a relatively large number of loans to construction (74 loans for NAICS 23) and wholesale (67 loans for NAICS 42) businesses. These industries provide important support services for a number of projects and businesses and CEF appropriately plays a strong role in providing finance support to these sectors. Benchmarking State Business Capital Programs 48

49 Capital Access Program (CAP) CAP cannot be said to have a dominant position within a specific market segment. However, CAP does support a substantial number of loans to retail businesses (42 loans to NAICS 44-45). Furthermore, the program supports more loans to agriculture and forestry (22 loans to NAICS 11), transportation and warehousing (20 loans to NAICS 48-49), professional services (37 loans to NAICS 54) and food services (loans to NAICS 72) than other Oregon business finance programs. These numbers suggest that CAP is filling a particular market niche, albeit across multiple industries. As with CEF, the need that CAP fills is for credit enhancement. By providing even a small contribution to a loan loss reserve fund, CAP enhances banks abilities to conduct small business lending in the state. This need is particularly apparent in various service sectors 21 supported by Business Oregon. Manufacturing Support Global logistics firm assisted by SRF Manufacturing is the primary focus industry for multiple Oregon finance programs, as discussed in the Portfolio Analysis. In addition to CEF, manufacturing businesses account for the majority of projects assisted by the IDB, OBDF and SRF programs. For OBDF and SRF, the degree of support provided 110 loans and 108 forgivable loans/grants, respectively is particularly strong. The first reason that OBDF and SRF effectively support the manufacturing sector relates to policy. OBDF explicitly emphasizes the manufacturing industry, along with processing and distribution, as an eligible requirement for program assistance. SRF is designed for projects with broad regional impacts, and inasmuch as private projects are considered, manufacturers can often claim such effects easier than other business types. OBDF provided a loan for this advanced manufacturer. The second reason these programs are wellsuited to manufacturing is the low cost of large amounts of capital. OBDF finances up to $1 million at just one percent above Treasury rates or at a lower rate in the state s many distressed areas. SRF is a forgivable loan (i.e. grant) program capital cannot come at a better price than free with no hard limit. Manufacturing projects are often large and expensive, and OBDF and SRF are therefore able to provide expanding businesses with a desirable product. 21 Oregon business finance programs are active in four service industries defined by NAICS: professional (54), administrative (56), food (72) and other (81). Benchmarking State Business Capital Programs 49

50 Export Support Business Oregon manages two programs that provide financial support in the form of reimbursements to businesses looking to identify sales opportunities overseas. The programs are OTPP and STEP. Each provides significant funding to a variety of businesses and industries throughout the state. OTPP and STEP are available to many industries, but the programs appear to be particularly effective within the state s advanced manufacturing and outdoor gear industries. The involvement in outdoor gear (71 businesses in the current program cycles) is particularly useful for the state, as this sector is not clearly addressed by other Business Oregon programs. Benchmarking State Business Capital Programs 50

51 Sound Programs with Growth Opportunities A development finance program can be sound and yet not readily achieve a strong position as a meaningful asset within a market segment. A sound program has reasonable policies, rates and terms that ought to be attractive and at least a justifiable credit history. Despite having these important factors, some programs do not reach their full potential out of the gate. There are many factors that can cause an apparently-sound program to have limited effectiveness. A common culprit is under-marketing of the program to financial partners and potential borrowers. Another frequent problem occurs when a program is too similar to a better-known program. A final issue may arise when the market s needs move beyond the scope of the program. In some cases, a sound program may yet be able to capitalize on opportunities and grow to become important to key industries and business types. Markets may shift businesses needs in favor of the program. Changes to limits, rates or terms may also be sufficient to open the program to a new class of borrowers. The following discussion addresses Oregon business finance programs that appear ready to capitalize on growth opportunities. Industrial Development Bonds (IDB) Bond finance is a powerful, but complicated, tool relative to a traditional economic development loan fund. Bonds are just another form of debt, but they require the assistance of an issuer, underwriter, bond counsel and other professionals to ensure the proper issuance of the bonds. When bonds are issued on a tax-exempt basis, the complexity of meeting various federal tax code requirements is added to these structural considerations. Inexperienced customers can easily lose their appetite for tax-exempt bond finance s low cost capital particularly when market rates for commercial lending are already low. Plywood plant adds shift thanks to IDB financing. Business Oregon s IDB program provides a model for facilitating bond finance access for various types of customers. Within this program, the Department can issue two categories of federal tax-exempt private activity bonds as well as taxable bonds. 22 These offerings can cover small (in bond finance terms) manufacturing projects, solid waste and other private infrastructure projects at relatively low interest rates, as well as a much broader range of projects at competitive rates. The real strength of the Department s bond financing lies within the Oregon Express Bond program. This subcategory of the IDB program can facilitate projects from $500,000 to $5 million sizes that would frequently make the issuing costs prohibitively expensive. Despite the on-paper strength of the IDB program, Business Oregon has issued bonds for only one-two projects per year. These services do make an important impact for the state s economy, particularly for the manufacturing sector. Bonds issued for just 16 manufacturing projects since 2004 provided more 22 For more information on the various types and categories of bond finance, visit the CDFA Bond Finance Resource Center at Benchmarking State Business Capital Programs 51

52 than $205 million in capital assistance. While the monetary support is impressive, the limited number of projects nonetheless prevents the program from being considered to have a strong market position. In most ways, the IDB program can most accurately be described as a victim of market changes. The capital needs of small manufacturers have increased, and federal tax-exempt bonds for manufacturers have a size limitation of $10 million, as well as additional size restrictions. Further, low interest rates have limited the maximum value of tax-exempt financing. Combine the size limitations with the limited rate benefit, as well as high issuance costs due to the many professionals who need to be involved with a bond finance transaction, and many borrowers simply prefer to stay away. This situation is playing itself out in other states as well: industrial development bond issuance diminished significantly throughout the country from and has since leveled off below $400 million per year. 23 The greatest growth opportunity for the IDB program is likely to come as continued economic recovery drives interest rates higher. As this occurs, tax-exempt financing will become a more attractive option to potential borrowers. Business Oregon will only be able to take advantage of this counter-swing in market conditions if the program has continued to be marketed and streamlining efforts like the Express program remain in effect. Entrepreneurial Development Loan Fund (EDLF) EDLF is designed to serve a particular market need small and emerging businesses. States need to support these types of borrowers, which comprise the majority of firms yet regularly struggle to access commercial lending. EDLF has assisted 87 companies in the project period, and the program is clearly having an impact across the state. While EDLF is assisting entrepreneurs, the program is not establishing a clear position in any specific sectors. CAP is in a similar situation, but CAP s high volume of projects allows for a degree of confidence in interpreting the program s diversity as a sign of multidisciplinary effectiveness. The lower volume of projects assisted through EDLF does not permit the same degree of confidence in such an interpretation. EDLF has made its highest number of loans to manufacturing businesses (15 loans for NAICS 31-33), but has made five or fewer loans to another seven industries. EDLF assisted this food manufacturer. Because EDLF serves entrepreneurs, who can be found in any industry, the lack of specific industry focus may not be a concern for Business Oregon. To the extent that the Department is interested in enhancing its programs positions within industries, EDLF should explore opportunities for growth. Along with manufacturing, the program has a bit of a foothold in retail (13 loans for NAICS 44-45) and food services (10 loans for NAICS 10). These projects could provide a starting point from which to grow EDLF into a significant asset for these industries. 23 Council of Development Finance Agencies. (2014). National Volume Cap Map & Report. Retrieved 8/2014 from: Benchmarking State Business Capital Programs 52

53 Market Needs & Concerns Oregon business finance programs play an important role in the state s economy. Program investments catalyze projects that create jobs and have other, broad economic impacts. Programs can also target specific sectors of the state s economy, encouraging the emergence and growth of companies in core industries. In order to be effective in this role, the Department must understand the market needs of these targeted sectors. The following subsections provide an overview of these concerns. Advanced Manufacturing Advanced manufacturing is a broad sector comprised of diverse firms with diverse, and often competing, concerns. However, all companies deserving the advanced designation place an emphasis on using innovative technologies in their production processes. These firms are confronted with three primary concerns in the post-recession market. The first, workforce skills and training, is outside the scope of Oregon s business finance programs. The other challenges, innovation costs and collateral value, are relevant to the Department. Many firms in the advanced manufacturing sector struggle to cover the risks of innovation. The federal government makes relatively limited investments in research and development (R&D), and federal tax policies do not promote innovation and investment. 24 As the need to innovate rises but the financial resources to do so remain stagnant, advanced manufacturing businesses are increasingly turning to states for help offsetting R&D costs. Many states are utilizing cluster-based approaches to target R&D programs and leverage successes by creating in-state opportunities up and down the sector s supply chain. In Oregon, NAICS industries that are now commonly associated with advanced manufacturing represent 11 of the top 25 industries exporting goods Oregon, by dollar value. 25 This suggests that the state is effectively cultivating a cluster of advanced manufacturers, an effort that is certainly supported by the Department s $26 million in loans to these businesses since While Oregon s business finance programs do not directly finance R&D costs, the programs can be used to acquire equipment and free up other funds for firms investments in innovation. A related challenge for advanced manufacturing firms is the declining values of machinery and equipment. This has a direct effect on businesses ability to borrow. Loan amounts and terms are often tied to the value and life of an asset, and as these decrease, so too may a bank s willingness to extend favorable loans. Similarly, assets that have weak values also serve as proportionally weak collateral. This again affects the amount of a loan that a bank will offer to an otherwise strong client. This challenge is being directly addressed by Business Oregon, primarily through CEF. The purpose of this program is to provide a guarantee that encourages commercial banks to make a loan that lacks sufficient coverage for the banks underwriting standards. The program has been very impactful in the advanced manufacturing sector, accounting for nearly 60 loans to these firms since Muro, M., Fikri, K., & Andes, S. (2014). Powering Advanced Industries State by State. Washington, D.C.: Brookings Institution. 25 U.S. Census Bureau (see footnote 19). 26 The core industry loan amount figure is from the Portfolio Analysis. Note that this analysis only reflects projects that had a description entered by staff and do not represent the totality of Business Oregon loans. Benchmarking State Business Capital Programs 53

54 Clean Technology The clean technology sector encompasses two diverse classes of business activities: the manufacturing and the deployment of clean technologies. Firms engaged in the manufacturing of clean technologies share concerns with the advanced manufacturing industry and, in many cases, would likely count in both sectors. The state provides additional support to clean technology innovation through Oregon s Signature Research Centers. The deployment of clean technologies often entails both construction and services industries. Oregon business finance programs currently provide substantial support for construction projects but are substantially less engaged in financing services industries. To the extent that capital access is a problem for clean technology deployment, the Department could investigate expanding its programs abilities to reach these businesses. A critical concern for the clean technology industry is the role of energy policy, both locally and nationally, in leveling the playing field among energy sources. Oregon has an outstanding reputation for being highly supportive of adopting alternative technologies, but these efforts may be stalled by shifts in political priorities. The state is still reliant on coal for much of its energy production, and competition between energy producers can be a hot-button issue, especially when jobs are on the line. To the extent that financing programs address clean technology project costs, these programs may be able to help maintain the sector s momentum even in the face of political reprioritization. Most states that are successfully leveraging public financing for clean energy development are doing so through cooperation between development finance agencies and clean energy offices. 27 This degree of coordination is not overtly present in current Oregon business finance programs and may be an area for future consideration. Forestry & Wood Products Oregon s forestry industry is a key component of the state s economy. Forestry is responsible for over 37,000 jobs, with an average wage of $47,000, and nine percent of state GDP. 28 Forestry and wood products also account for two of the top 25 Oregon industries for exports by dollar value. 29 A recent industry report revealed a need for expanding access to foreign markets, especially to China, where demand has risen significantly. 30 The most important need identified by industry stakeholders was for workforce development and logger training, which is not an element of business finance programs. Business Oregon s export opportunity programs, OTPP and STEP, are well-suited to assist the industry in gaining access to global markets. As firms increase their capital expenditures to accommodate increased sales, CEF, IDB and OBDF will be positioned to continue their financing support for the forestry and wood products industry. 27 Milford, L., Saha, D., Muro, M., Sanders, R., & Rittner, T. (2014). Clean Energy Finance Through the Bond Market: A New Option for Progress. Washington, D.C.: Brookings-Rockefeller. 28 U.S. Census Bureau. (2014). County Business Patterns. Retrieved 9/2014 from: 29 U.S. Census Bureau (see footnote 19). 30 Oregon Forest Resources Institute. (2012). Forest Report. Portland: Oregon Forest Resources Institute. Benchmarking State Business Capital Programs 54

55 High Technology The high technology cluster presents a critical opportunity for the Oregon economy. Firms in this industry tend to pay significantly higher than average wages and have tremendous growth prospects. According to the Oregon Employment Department, the high technology sector is responsible for about 58,000 jobs, which pay an average of $105,000 each. 31 The sector also includes seven of Oregon s top 25 exporting industries, accounting for 40% of all Oregon exports by dollar. 32 Despite these opportunities, the high technology sector is not without challenges. Electronics manufacturers, including producers of semiconductors and data processing units, saw employment decline during the recession. A significant challenge for the state s development work with this industry may be geographic distribution: high technology firms are almost exclusively located in the urban areas of Portland, Corvallis, Salem and Eugene. 33 Regardless, support for this industry may be largely outside of the scope of business finance programs, which have had minimal activity with high technology firms apart from some advanced manufacturers. The Oregon Innovation Council provides programs that may be better-suited to assisting high technology firms, at least until those companies develop substantial capital needs. Outdoor Gear and Activewear Oregon leads the nation in the specialized design, manufacturing and exporting of outdoor gear and activewear. This industry is well-established in the state, due to the presence and expertise of a large number of related firms, including more than a fair share of internationally-known brands. Unlike the majority of industries discussed in this section, outdoor gear and activewear firms tend to rely on contract manufacturing. As a result, the industry has less of a need for substantial capital expenditures and tend to seek smaller loan amounts. Rather than seeking loans for capital expenditures, outdoor gear and activewear firms have a critical need for working capital. A 2010 industry cluster analysis found that the availability of working capital is the key limiter of revenue growth for design and related firms in the industry. 34 The need arises because of the significant gap in time between payouts to manufacturers and receiving sales revenue. OBDF can provide working capital, but this type of lending is a particular emphasis for CAP. However, the Department s financing assistance to businesses in this sector has been minimal. To the extent that access to working capital continues to be a limiter for the sector, expanding the marketing of CAP and OBDF to outdoor gear and activewear firms could facilitate meaningful growth for the sector as a whole. 31 Data based on NAICS codes for 334 (Electronics Manufacturing), 5112 (Software) and 5415 (Information Services) from Cortright, J. (2013). Technology Industry Cluster Study. Portland: Impresa Economics. 32 U.S. Census Bureau (see footnote 19). 33 Cortright (see footnote 31). 34 Cortright, J. (2010). The Athletic and Outdoor Industry Cluster. Portland: Impresa Economics. Benchmarking State Business Capital Programs 55

56 Program Weaknesses Even the best operators in any industry have weaknesses that can be improved upon. Business Oregon, which operates a largely effective suite of business finance programs, is no exception to this rule. If the following program traits can be minimized, then the Department will be that much more efficient and effective in growing the Oregon economy. Program Utilization Several Oregon business finance programs appear to be underutilized relative to the programs available capital resources. Underutilization is a weakness for two reasons. First, the scenario suggests that more businesses could be benefitting from the programs assistance, and thereby growing the state s economy by that many more jobs. Second, capitalized funds that are not being accessed close to a practical capacity present an inefficient use of resources. For these reasons, fund utilization is an important sign of program strength. The programs that primarily exhibit an underutilization concern are EDLF, IDB and OBDF. The IDB program is a special case because states neither save nor generate capital to issue bonds the (dis)use of the program has no opportunity costs for the state. Nonetheless, as a financing tool that can provide millions of dollars in relatively low-cost capital to manufacturing and infrastructure projects, the limited usage of IDB is important to note. EDLF and OBDF do maintain funds, and when these programs save more than is necessary for conservative reserve funds, the excess appears to constitute an inefficient use of funds. A key reason why development finance programs may be underutilized is that a market for the program may be limited. When commercial interest rates are low, as they have been over the past several years, businesses often prefer to make the project modifications necessary to access bank financing, rather than deal with the paperwork and reporting required by public finance programs. Many borrowers prefer to pay more rather than work with the state. This is certainly a common criticism with bond finance (e.g., the IDB program) in many states and may be a concern with EDLF and OBDF as well. Unfortunately, because interest rates and borrower preferences are set by external entities, states have a difficult time addressing a market-based reason for limited use. A second reason for program underutilization is often limited awareness among potential borrowers. Development finance is a niche topic that many people do not even attempt to understand until it becomes necessary for them to do so. Many business owners who could benefit from the programs likely receive a rejection from a bank or two and then decide to downsize or postpone their expansion plans. Increased awareness of the Department s brand and the existence of various business finance programs could facilitate additional loans and improve utilization. Program Risk Profile Every loan fund has a risk appetite a level of risk that is deemed preferable. Little-to-no risk is not necessarily the best option for every fund. For example, small and new businesses have a greater chance of failing than established businesses, and programs targeting entrepreneurs will therefore seek greater risk than programs targeting established firms. Commercial lending tends to have a very low risk appetite. Economic development funds typically accept greater risk, as these normally target projects Benchmarking State Business Capital Programs 56

57 that are not quite bankable. This higher level of risk helps the fund ensure that it is not competing with banks, which are important partners, while financing projects that have important potential economic development payoffs for the state. The Portfolio Analysis suggests that two Oregon business finance programs may be particularly risk averse in their lending decisions: OBDF and CEF. These programs have exceptionally low loss rates, 1.6 percent and 0.5 percent, respectively. From an asset quality perspective, this is a great strength. However, risk aversion may be limiting the potential economic impacts of the programs. To the extent that these rates are low because delinquent borrowers are receiving extended terms and assistance, the apparent low risk appetite may, in reality, be the result of the Department s flexibility. However, because so few loans receive negative risk ratings, the limited risk appetite appears to be legitimate. With such low rates, there are likely to be many more businesses and projects of comparable funding that could benefit from assistance but may be failing program standards or underwriting requirements. A greater risk appetite must be compensated accordingly. OBDF and CEF could likely assume a bit more risk without substantially increasing program terms and rates. However, a substantial increase in these programs risk appetites would require higher rates and/or shorter terms in order to balance out the increased losses. Whether the potential rewards are worth the changes is a matter for discussion. Service Industry Support Over the past decade, Oregon business finance programs have supported firms in almost every NAICS designation. The distribution of this financial assistance in part by design has been far from even across market segments. Targeting core industries, such as manufacturing and clean technology, is good policy. A targeted strategy provides clear objectives and focuses lending decisions. However, consideration should also be given to how further support for additional industries may help achieve Business Oregon s mission of cultivating living-wage jobs. Table 13. Oregon Business Finance Program Loans by NAICS Service Industry, Service Industry Loans 51 Information Finance & Insurance 4 53 Real Estate 24 Specifically, the Department s business finance programs 54 Professional 69 have provided comparatively limited support for services 55 Management 0 industries. Loan numbers by NAICS service industry are available in Table 13. Professional services are relatively 56 Administrative 35 well-represented, but the remaining types of service industries received few loans over the past decade. In all cases, the CAP program provided at least the plurality of loans made to these sectors. CEF came in second, with Educational Health Care Entertainment minimal lending from the other finance programs. These 81 Other 34 lending outcomes presumably have been driven by Business Oregon s emphasis on other industries, but at least a partial Service Industries Total 221 reconsideration of the strategy may be worthwhile. Four of these service industries information, finance and insurance, professional and management have higher average annual wages in Oregon than manufacturing, wholesale and construction three of the Benchmarking State Business Capital Programs 57

58 Department s most active borrower industries. 35 If additional loans were made available to these services industries, then the programs may become even more effective at delivering on the goal of increasing the availability of high-paying jobs. Outcome Data Many methods can be used to evaluate and improve programs, but data-driven analysis is often the most effective option. Oregon s business finance programs collect a substantial amount of data. However, the consistency of this data across programs and the accuracy of some of the collected data do not appear to be at an ideal level. The current data quality lends itself more to inferences regarding program performance than to concrete conclusions. To be certain, data collection comes at the cost of streamlined and efficient application processes. Consideration for this trade-off is the driver of the current data quality. Because Business Oregon s strategy explicitly appeals to outcome-based, rather than program-based, evaluations, this shortcoming may nonetheless be worth further investigation. Two specific outcome metrics are limited: private leverage and jobs supported. Private leverage could particularly be enhanced in Business Oregon s data collection. For example, CAP is designed to offer a small reserve fund against the full loan value by definition, this program should yield approximately $0.90 of private lending per public dollar on each loan. However, the Department s loan tracking software data reports leverage of just $0.12 per public dollar. If efforts were made to fully and accurately report the full amount of private lending or equity in each project, the state would have a much better understanding of the investment catalyzed by these programs. Job data is a universally difficult metric to track. Business Oregon is utilizing proposed full-time equivalent job creation and retention for the majority of its programs. A post-hoc analysis, perhaps due with the final payment, would be a more reliable number to analyze. Even better, adding a measure for increased wages would yield a wealth of information that would inform program performance in light of the Department s mission and vision. Regardless of the exact metrics used, efforts could be made to ensure that comparable data is collected and entered across all Oregon business finance programs. This consistency is critical to effective comparative program analysis. 35 U.S. Bureau of Labor Statistics. (2014). Quarterly Census of Employment and Wages. Retrieved 9/2014 from: Benchmarking State Business Capital Programs 58

59 Benchmarking State Business Capital Programs Section A: Portfolio Analysis Section B: Demand / Supply Match Analysis Section C: Alternative Coverage Assessment Section D: Recommendations Benchmarking State Business Capital Programs 59

60 Comparison State Alternative Coverage Programs Business Oregon maintains an objectively strong suite of business finance programs, but the state does not operate in a vacuum. Other states are competing for comparable, if not the same, projects and businesses. Many of these states also provide strong finance programs. Taking this context into account, evaluating the Oregon business finance programs on their own merits is insufficient. The following subsections therefore review the business finance programs in four states comparable to Oregon: Colorado, Maine, Maryland and Washington. Colorado Oregon and Colorado have many similarities. Economically, the states target similar industries: particularly advanced manufacturing, clean technology and high technology. 36 Additional economic overlaps can be seen in the states attention to craft beverages and outdoor activities. Colorado is currently experiencing excellent economic growth, although Oregon s growth is strong as well. 37 Each state also utilizes a robust development finance entity to manage the state s development finance programs. In Colorado, this organization is the Colorado Housing and Finance Authority (CHFA). While CHFA provides many programs and services oriented to affordable housing, the organization also operates the majority of the state s business finance programs. CHFA s most relevant programs are described below. Colorado Fresh Food Financing Fund The Colorado Fresh Food Financing Fund (CO4F) is a public-private partnership loan and grant fund created to finance grocery stores and other forms of healthy food retail in underserved communities throughout Colorado. This statewide fund is anticipated to leverage $20 million in investments and improve food access for Coloradoans. 36 Colorado Office of Economic Development and International Trade. (2014). Key Industries. Retrieved 9/2014 from: 37 Kiersz, A. & Holodny, E. (2014). Here s how all 50 state economies are doing, ranked from slowest to fastest. Business Insider. Retrieved 9/2014 from: Benchmarking State Business Capital Programs 60

61 Green Colorado Credit Reserve There are two components of the CEO Fund: (a) the green Colorado Credit Reserve program (the GCCR Program ), under which a portion of funds will be used to establish a loan loss reserve fund for lenders originating smaller loans under the GCCR Program and (b) the Revolving Loan Program (the RLP ), under which a portion of the funds are used to establish a revolving loan fund for medium and larger sized loans. Type of Financing Eligibility Criteria Amount Rates Terms Credit Enhancement The borrower must be carrying on a trade or business primarily within the State. Must be used to directly or indirectly promote energy efficiency or renewable energy generation. Up to $250,000. Larger loans may be considered by the Program Manager on a case by case basis. Set by lender Set by lender Colorado Capital Access Colorado Capital Access (CCA) helps small and medium sized businesses access capital by providing a pooled loan-loss reserve fund that lenders may use to recover losses associated with loans registered in the program. CCA is managed by the Colorado Housing and Finance Authority with oversight by the Economic Development Commission and the Office of Economic Development and International Trade. Reserve funds are pooled in a bank account established with the lender. Funds can be used to offset losses on registered loans. Type of Financing Eligibility Criteria Credit Enhancement Lender and barrower are each required to contribute a minimum of 1% to enroll. Business borrower must have less than 750 employees at the time of the financing Amount Maximum loan size is $750,000 Rates Terms Set by lender Set by lender Other Details Each loan a participating lender registers in the CCA program is eligible for a $1- for-$1 match of reserve funds, up to 7% of the loan amount. Benchmarking State Business Capital Programs 61

62 Colorado Credit Reserve The Colorado Credit Reserve ( CCR ) Program is a pool guaranty program. The program assists lenders in making these loans by establishing a loan loss reserve account with the lender as additional security. Each participating lender makes the underwriting decisions, sets the terms and services the loan. Type of Financing Eligibility Criteria Amount Credit Enhancement The borrower must be carrying on a trade or business primarily within the state. The primary economic benefit of the loan must be contained in Colorado. The borrower s business may be not-for-profit or for profit. The aggregate principal amount of all Registered Loans to any borrower or any affiliates of a borrower shall not exceed $500,000. Cash Collateral Support Rates Loan Amount CCR Match Borrower Fee $0 65,000 Fixed at $2, % $66, , % 1.0% $251, ,000 $7, % Terms Set by lender Cash Collateral Support (CCS) is designed to help small and medium sized businesses access capital that would otherwise be unavailable due to collateral shortfalls. Lenders can apply for up to $1.25 million in collateral support to strengthen small business loan applications. Type of Financing Eligibility Criteria Amount Rates Terms Credit Enhancement To be eligible for collateral support, lenders must demonstrate: A collateral shortfall; There is a reasonable expectation that the business borrower will repay the loan as agreed; and Business borrower must have less than 750 employees. Maximum loan size that is supported by CCS is $5 million Set by lender Initial term of 3 years Benchmarking State Business Capital Programs 62

63 CHFA Rural Development Loans CHFA provides low interest rate loans to lenders allowing them the flexibility to establish their own program for business customers in rural communities to finance owner-occupied commercial real estate and equipment purchases. Type of Financing Indirect Loan Eligibility Criteria Located in rural communities with populations of less than 25,000 Amount Maximum loan size is $500,000 Rates Terms Other Details Fixed interest rates; below market in specific areas Up to 20 years for real estate Up to 10 years for equipment 90% financing available No prepayment penalties Benchmarking State Business Capital Programs 63

64 Maine Oregon and Maine share a few important economic similarities. More than 98 percent of the land areas in each state is designated rural, although Oregon s population is far more urban than Maine s population. 38 In the use of their rural land, both states place a high degree of emphasis on forestry and wood products forest product exports accounted for one-third of all Maine exports in However, while Oregon s economy is growing, Maine s economy is currently in decline. 40 Maine, like Oregon, operates an effective economic development finance organization. This entity is the Finance Authority of Maine (FAME). Like Business Oregon, FAME operates a variety of lending programs, but many more of FAME s programs are targeted to very specific business activities, such as oil storage or potato marketing. In many cases, these specific programs are operated on behalf of other Maine agencies. The organization s primary business finance programs tend to be broadly applicable, and these programs are described below. Economic Recovery Loan Program This program provides subordinate (gap) financing to assist businesses in their efforts to remain viable and/or improve productivity. From time to time, FAME utilizes funds in this program to address specific business community needs. Type of Financing Eligibility Criteria Amount Rates Terms Other Details Direct Loan Maine-based businesses that exhibit a reasonable ability to repay the loan Demonstrate that other sources of capital have been exhausted. $750,000 maximum loan amount. Up to $1 million may be available if substantial public benefit is demonstrated and sufficient funds available. Fixed rate - Wall Street Journal Prime plus 2%, set at commitment Maximum of 5 years Amortization may be based on the useful life of the assets being financed or additional collateral pledged. Balloon payments typically required. 38 U.S. Census Bureau. (2012). Lists of Population, Land Area, and Percent Urban and Rural in 2010 and Changes from 2000 to Retrieved 9/2014 from: 39 Maine Forest Product Council. (2014). Forest products top Maine exports. Retrieved 9/2014 from: 40 Kiersz & Holodny (see footnote 37). Benchmarking State Business Capital Programs 64

65 Intermediary Relending Program This program is designed to assist small businesses by providing subordinate financing for any prudent business activity (some restrictions apply). Type of Financing Eligibility Criteria Direct Loan Most Maine-based businesses, except agriculture Must be located outside defined urban areas Must demonstrate historical ability to service debt Must show efforts made to access additional sources of capital Must demonstrate employment of low-income persons, farm families and displaced farm families Amount Not to exceed 75% of project cost, up to a maximum loan amount of $250,000. Rates Terms Wall Street Journal Prime (fixed at commitment) Real estate: Up to 20 years Machinery and equipment: Up to 10 years All other: Up to 7 years Regional Economic Development Revolving Loan Program This program is designed to make loans through Maine's regional economic development agencies for the purpose of creating or retaining jobs. FAME makes disbursements to regional economic development agencies and the agencies in turn make loans to eligible borrowers. Type of Financing Indirect Loan Eligibility Criteria Businesses that have sales under $5,000,000 or employ 50 or fewer employees, conducting business in the following categories: Advanced manufacturing technologies. Advanced information systems. Advanced biological/natural resource technologies. Conversion from defense industry. Significant export involvement (goods or services). Significant research and development. Micro-businesses (under 10 employees). Quality childcare projects (also administered directly by FAME). Amount 33% of total project cost, up to a maximum loan amount of $250,000; 50% of total project cost, for projects between $50,000 and $100,000; 100% of total project cost, for projects less than $50,000. Rates Negotiated with regional agency, usually below market Terms Up to 20 years depending on assets being financed Benchmarking State Business Capital Programs 65

66 Maine Economic Development Venture Capital Revolving Investment Program This program is designed to allow the state to invest as an equal partner with others in eligible private venture capital funds to support emerging and early-growth businesses in Maine. It is intended to utilize experienced professional fund managers to increase the probability of successful investments in recipient companies. Maximum investment of $1 million per fund. Major Business Expansion Bond Program This program provides long-term, credit-enhanced financing up to $25 million at taxable bond rates for businesses creating or retaining 50 jobs and long-term, tax-exempt bond rates on bonds of up to $10 million that are used to finance manufacturing expansions. Type of Financing Bonds Eligibility Criteria A business must create or retain at least 50 jobs. Bond proceeds may be used to acquire real estate, machinery, equipment or fixtures, or expand or rehabilitate a facility. Any business with the historical capacity to service the proposed bond debt. Amount Tax-Exempt: Taxable: $1 million - $10 million $1 million - $25 million Rates Determined by market at the time of bond sale or placement Terms Vary by project Linked Investment Program for Agriculture This program reduces a borrower's interest rate. Loans are approved and funded by lenders according to their own policies. The Maine State Treasurer will make a deposit in the form of a Certificate of Deposit with the originating lender at up to 2% less than prevailing rate, provided similar discount is applied to the interest rate on the lender's loan to the business. Must be applied to an agricultural operating loan. Maximum CD investment of $200,000 (actual loan may be greater). Benchmarking State Business Capital Programs 66

67 Linked Investment Program for Commercial Enterprises This program reduces borrower's interest rate. Loans will be approved and funded by lenders according to their own policies. The Maine State Treasurer will make a deposit in the form of a Certificate of Deposit (CD) at up to 2% less than prevailing rate providing similar discount is applied on the lender's loan to the business. Type of Financing Credit Enhancement Eligibility Criteria Non-agricultural, for-profit businesses located in Maine. 20 or fewer employees or annual sales of less than $2,500,000. Must be a manufacturer or have 70% of sales outside the State. Loan proceeds for real property, fixed assets, research or working capital. 50% owned by Maine residents. Create or retain one job for each $20,000 of deposited funds. Amount Maximum CD investment of $200,000 (actual loan amount may be greater). Rates Up to 2% interest rate savings to borrower. Terms CD investment made for maximum of one year (loan term may be greater). Participation limited to two years. Benchmarking State Business Capital Programs 67

68 Loan Insurance Program Through the Loan Insurance Program, FAME insures a portion of a loan to a business made by a participating financial institution. Type of Financing Credit Enhancement Eligibility Criteria Businesses located in the state of Maine. Amount Traditional Application Process: Up to 90% of a lender's loan on a pro-rata basis or up to 25% on a leveraged basis. 100% insurance is available for loans to veterans, oil storage facility projects and waste oil disposal site clean-up projects. FAME exposure to any one relationship may not exceed $4,200,000 (this amount is reviewed and set annually). Refinance of Existing Debt: up to 40% of lender's loan on a pro rata basis. OLA Application Process: Up to 75% of a lender's loan on a pro-rata basis. FAME exposure may not exceed $250,000. Working Capital Lines: up to 90% pro rata limited to $1,000,000 of FAME exposure or up to 20% leveraged limited to $500,000 of FAME exposure. Rates Set by lender Terms Set by lender Other Details Insurance Types: Pro-rata: covers a certain percentage of lender's loss after a default and liquidation, up to 100%. Leveraged: Covers a certain percentage of lender's loss up to 25% of the loan amount at the time of default. Benchmarking State Business Capital Programs 68

69 Maryland Oregon and Maryland do not share as many similarities as the other states on this list, but this is not to say that the economies of the states are entirely distinct. Both Oregon and Maryland are interested in developing high technology companies and in advanced manufacturing. Like Oregon, Maryland also has some significant involvement in clean technology (primarily through offshore wind) and forestry. Further, more than 80 percent of the populations in both states live in urban areas, although a much larger portion of Maryland s land area is considered urban. 41 Some of the notable differences between the states are Maryland s higher population, emphasis on the financial services sector and an economy that is sending a mix of signals with a declining labor force (and unemployment rate), increasing wages and decreasing exports. 42 The states are not well-suited to an apples-to-apples comparison. The reason Maryland is included as a point of comparison is the array of robust business finance programs provided through the state s Department of Business & Economic Development (DBED). Through DBED, the state runs tourism and film projects, state marketing, a biotechnology development center and a venture capital fund, as well as business development and financing programs comparable to the Oregon business finance programs. The most relevant DBED programs are reviewed below. ADVANCE Maryland ADVANCE Maryland is a program for second-stage entrepreneurs that helps businesses address their unique challenges and identify new opportunities. ADVANCE Maryland provides a research team that mines sophisticated databases and leverages a number of high-end business development tools related to search engine optimization, social media marketing and geographic information systems. The team will work closely with selected companies to identify the scope and goals of their research. Economic Development Opportunities Program Fund (Sunny Day) The Sunny Day fund supports extraordinary economic development opportunities that create and retain employment as well as create significant capital investments. Projects must generate significant jobs in areas of high unemployment; they are evaluated on a competitive basis and must be consistent with the state's strategic economic development plan. Type of Financing Eligibility Criteria Amount Rates & Terms Direct Capital (loan, grant or investment) Each Sunny Day project be deemed an extraordinary economic development opportunity, as defined by the following criteria: Recipient must maintain strong financial condition and minimal risk profile; and Minimum of 5:1 capital investment by the recipient for each $1 of Sunny Day funds Any amount Unspecified 41 U.S. Census Bureau (see footnote 38). 42 Kiersz & Holodny (see footnote 37). Benchmarking State Business Capital Programs 69

70 Maryland Economic Adjustment Fund (MEAF) MEAF assists small businesses with upgrading manufacturing operations, developing commercial applications for technology, or entering into and competing in new economic markets. In addition to making loans to eligible companies, the fund is able to make grants for Revolving Loan Funds administered by local or regional governments, or non-profit economic development organizations. Type of Financing Eligibility Criteria Loan (direct or indirect) Funding assistance through MEAF is available to small businesses in all regions of the state. Applicants must be creditworthy but must not be able to obtain affordable financing through normal lending channels. Amount Maximum loan amount is $500,000 Rates Terms Unspecified Unspecified Maryland Economic Development Assistance Authority and Fund (MEDAAF) A flexible and broad-based program, MEDAAF funds grants, loans and investments to support economic development initiatives. Uses include business attraction and retention, infrastructure support, brownfield redevelopment, arts and entertainment districts, daycare, revolving loan funds and local strategic planning. Projects must be within Priority Funding Areas and eligible industry sectors. Awards are made on a competitive basis. Five financing capabilities are offered through the Maryland Economic Development Assistance Authority and Fund (MEDAAF) with assistance being provided to the business community and political jurisdictions. Strategic Economic Development Opportunities Type of Financing Eligibility Criteria Amount Direct Lending Provides assistance to companies in eligible industries with a significant Impacts on a statewide or regional level. Maximum assistance under this capability cannot exceed the lesser of $10 million or 20% of the current fund balance. Rates Target rate of interest for the loans is 3% Terms Other Details Can be structured with flexible terms This capability has had limited use due to budget constraints on funding for MEDAAF. Benchmarking State Business Capital Programs 70

71 Local Economic Development Opportunities A project that provides a valuable economic development opportunity to the jurisdiction in which the project is located and is a priority for the governing body of that jurisdiction Type of Financing Eligibility Criteria Indirect Capital (loan, grant or investment) All assistance under this capability must be endorsed through a formal resolution by the governing body of the jurisdiction in which the project is located. The local jurisdiction must participate in the form of an acceptable guarantee, a direct loan, or a grant in an amount equal to at least 10% of the total assistance. Amount Loans: Up to $5 million Conditional loans or grants: Up to $2 million Rates Terms The target interest rate on loans is up to ⅛ of 1% over the interest rate of the state s latest General Obligation Bond. Can be structured with flexible terms Direct Assistance to Local jurisdictions or MEDCO The Department may provide assistance to a local jurisdiction or to the MEDCO for local economic development needs including feasibility studies, economic development strategic plans and infrastructure. The Smart Growth Economic Development Infrastructure Fund (One Maryland) was consolidated into this capability. Regional or Local Revolving Loan Funds This capability provides assistance to local jurisdictions to help capitalize local revolving loan funds. Special Purpose Grants and Loans This capability contains targeted programs for specialty initiatives (e.g., brownfields). Benchmarking State Business Capital Programs 71

72 Maryland Industrial Development Financing Authority (MIDFA) MIDFA encourages private sector investments with insurance and the issuance of tax-exempt and taxable revenue bonds. Insurance reduces the lender's credit risk. All projects must be in a Priority Funding Area. While the transaction size is generally not limited, the credit enhancement is subject to the applicable program limits. Type of Financing Eligibility Criteria Amount Other Details Credit Enhancement Commercial and industrial businesses in a Priority Funding Area (except retail), manufacturers, not-for-profit entities and day care providers. Conventional Program: Insures up to 80%, not to exceed $2.5 million of a transactions made by a financial institution. Export transactions may be insured up to 90%. Bond Program: Insures bonds up to 100%, not to exceed $7.5 million of taxable or tax-exempt bonds. Private activity revenue bonds: Taxable Bond: Provides access to long-term capital markets for primarily fixed asset financing or Tax-Exempt Bond: Provides access to long term capital markets for fixed asset financing at tax-exempt rates. Eligibility is limited by Federal tax law to 501(c)(3) non-profit organizations, manufacturing facilities and certain solid waste projects. Additional limitations apply to the specific transaction type. Technology Commercialization Fund (TCF) Technology Commercialization Fund provides up to $100,000 to support projects that advance a technology toward commercialization. TCF is a convertible note bearing 8% interest. In the event that the company receives an aggregate outside investment of $500,000 or more, or in the event that the company sells substantial assets or equity, TEDCO may, at its sole option, convert the principal and interest due on the note at the time of the investment or sale to an equity investment in the company on the same terms and conditions received by the most recent investors. Maryland Small Business Development Financing Authority (MSBDFA) MSBDFA promotes the viability and expansion of businesses owned by economically and socially is advantaged entrepreneurs. MSBDFA uses include working capital, supplies and materials, machinery and equipment acquisition, and acquisition or real estate improvements. Other uses include the purchase of an existing franchise, construction or renovation and franchise fees or obtaining bid, performance and payment bonds for contracts, which receive the majority of their funding from federal, state or local government. Benchmarking State Business Capital Programs 72

73 Maryland Venture Fund The Fund was developed to make equity investments in new state enterprises. This initiative was enhanced to target investments in early stage, high technology companies experiencing difficulties attracting private sector investment dollars. Today, MVF activities are provided through five types of program activity described as: the Enterprise Investment Fund, the Challenge Investment Program, the Enterprise VCLP Fund, the Maryland/Israel Development Fund and the FIPS Certification Grant Program. Benchmarking State Business Capital Programs 73

74 Washington Oregon and Washington are neighbors, and their proximity and economic similarities provide ample reasons to compare the programs of the two states. Washington is a much more populous state than Oregon, but the states are interested in many of the same industries: advanced manufacturing, high technology and forestry and wood products, as well as international trade. The states are even performing comparably, with Washington ranked just a few places ahead of Oregon for overall economic growth in The states differ considerably in their approach to business finance. Washington does not have a strong, lending-based suite of programs. The state s current programs, housed within the Department of Commerce (Commerce), began with the U.S. Department of Treasury s State Small Business Credit Initiative (SSBCI) in Each of the state s business finance programs are operated through third party lenders, as Commerce does not maintain a loan servicing staff itself. The state s lending programs are described below. Export Voucher Program The Export Voucher program will be used to reimburse eligible SBCs for specific export related expenses. Voucher awards will be based on funds available, the number of applications submitted and the strength and completeness of the applications; late, weak or incomplete applications are ineligible for reimbursement. Type of Financing Eligibility Criteria Direct Grant Reimbursements In business for not less than the 1-year period ending on the date on which the Export Voucher is provided. Has in effect a strategic plan for exporting. Must demonstrate export readiness. Demonstrates understanding of the costs associated with exporting and doing business with foreign purchasers, including the costs of freight forwarding, customs brokers, packing and shipping. Operating profitably, based on operations in the United States Amount Reimbursement is limited to 75% of paid eligible expenses, not to exceed $5,000 Requires a minimum 25% cash match, or up to $1,667 for a full $5,000 Voucher Other Details Company cash match may not come from any other federal government source 43 Kiersz & Holodny (see footnote 37). Benchmarking State Business Capital Programs 74

75 Capital Support Program The Collateral Support Program (CSP) can help small businesses secure SBA 504 financing with their lenders when collateral support is a concern. CSP will place cash deposits with the lending institution as additional collateral support to help lenders approve the necessary bridge loan required to achieve SBA 504 approval. Type of Financing Eligibility Criteria Amount Rates Terms Credit Enhancement SBA qualified loans of up to $5 million, which may be used for a "business purpose", including: Heavy Equipment; Acquisition of a place of business; and Construction or renovation of a place of business. Any amount Fees range from 2-3% and are determined by the term of the approved bridge loan. 2% for a term of 6 months or less; 2.5% for a term between 6 and 12 months; and 3% for a term between 12 and 18 months. Up to 18 months Capital Access Program The Capital Access Program (CAP) can help small businesses secure financing in the difficult post-recession credit environment. The CAP encourages lenders to make small business loans that fall just short of conventional business loan approval. The program will mitigate the risk by providing additional funds that lenders can use to cover losses from loan defaults. Type of Financing Eligibility Criteria Amount Rates Terms Credit Enhancement All types of loans and lines of credit are eligible. Lenders build a loan-loss reserve each time they enroll a loan. $5,000 up to $1 million Set by lender Set by lender Benchmarking State Business Capital Programs 75

76 Craft3 Fund Craft3 is ideal for viable existing businesses that are considered unbankable. They specialize in underserved communities and can fund needs of $250k plus. The program is administered through a nonprofit Community Development Financial Institution (CDFI), partnering with smaller lending firms in the community as needed. Type of Financing Eligibility Criteria Amount Indirect Loan Been unable to access additional business credit; Experienced financial stress during the recession, but have managed through it; Prepared a plan and are ready to put credit to productive use; and Anticipated job creation in the next twelve months. Loan amounts up to $5 million Rates Interest rates generally range from 5% to 8% Terms Other Details Loans mature in 7 years; longer remuneration periods are available Fees equal 1% of the loan, plus legal fees and closing costs CERB Fund CERB is a state board focused on economic development through job creation in partnership with local governments. The Board has the authority to finance public infrastructure improvements that encourage new private business development and expansion. In addition to funding construction projects, CERB provides limited funding for studies that evaluate high-priority economic development projects. Type of Financing Eligibility Criteria Direct Loan or Grant The Committed Private Partner (CPP) Program requires a private business commitment as part of the public entity's application. Requirements include: Create significant jobs or Invest significant private capital; Hourly wages of created jobs must exceed county median wage; and 20% cash match. The Prospective Development Program is for rural communities only requires: 50% cash match and Demonstrate economic feasibility with supporting study showing likelihood of significant jobs and/or significant private investment Amount Loan: Up to $2 million Grant: Up to $150,000 grant or 50% of CERB request, whichever is less Rates & Terms Other Details Unspecified Project must be completed within 4 years Benchmarking State Business Capital Programs 76

77 W Fund The W Fund is a venture fund that is intended for companies in their early stages, emerging from state universities and research centers in the following sectors: life sciences, biotech, medical device, alternative energy and information technology fields. The goal of the W Fund is to spur innovation, business formation and job creation, taking advantage of the state s significant research and development base. Fund recipients must be located in Washington and create economic opportunity in the state s key growth sectors. Benchmarking State Business Capital Programs 77

78 State Comparison Matrix Comparison Area Business Oregon (Business Finance) Colorado Housing & Finance Authority Finance Authority of Maine Maryland Dept. of Business & Econ. Dev. Washington Dept. of Commerce Lending Programs Credit Enhancement Programs Multiple programs primarily focused on providing low-cost capital for large and manufacturing projects. Two programs addressing multiple industry sectors and offering very different types of support. + CHFA offers several strong programs but does not have Oregon s breadth. - CHFA emphasizes credit enhancement programs and offers several effective models. - FAME offers a wide variety of programs of various sizes and has streamlined processing. = FAME offers two types programs: linked deposit and loan insurance. = DBED operates a large number of lending programs of various purposes. + DBED does not place the same level of emphasis as enhancement, offering a capital access program. + Commerce does not operate direct lending programs but works through Craft3. + Commerce operates a capital access program and SBA 504 bridge loan enhancement program. Innovation & Entrepreneurial Programs One program dedicated to entrepreneurs and no equity. Pilot program would support the space. + CHFA does not provide debt or equity programs for new or emerging businesses. - FAME manages an investment program and several programs targeting new and small businesses. - Equity and innovationfocused services comprise a significant portion of DBED s programs. = Commerce supports and investment fund but other programs are for established businesses. Manufacturing Support Small Business Support Robust capital access support through multiple programs. Supported by a credit enhancement and lending program, with relatively light frequency. + CHFA does not have nearly the emphasis of Oregon on manufacturing. - CHFA s programs are more generally focused on small business finance and smaller projects. + Manufacturing is not as critical to Maine, and FAME provides more limited support. = FAME offers several general and targeted small business support programs. = DBED does not offer + Commerce does not many targeted programs to specifically target the the sector but has a sector and the lending dedicated industrial program is not well-suited. authority. - In addition to a dedicated small business finance entity, DBED emphasizes small loans and equity. = Lending, enhancement and venture programs of Commerce are all suited to small businesses. Other Sector Support Substantial support for construction and wholesale. Limited support for professional industries. = CHFA provides targeted opportunities to several sectors (e.g., green projects and fresh food). - FAME manages a wide array of targeted lending programs. = DBED places a great emphasis on technology but is not otherwise diverse. - Commerce s programs are spread across a variety of non-manufacturing sectors. Key + Oregon business finance has better coverage than the comparison state = Oregon business finance has comparable coverage to the comparison state Benchmarking State Business Capital Programs 78 - Oregon business finance has less coverage than the comparison state

79 Business Finance Program Recommended Practices As with any use of state funds, the operation of business finance programs should be done in accordance to recommended practices. Such adherence helps ensure appropriate, as well as efficient and effective, uses of public dollars. This section reviews several important recommended practices for business finance programs. Programs Serving the Business Spectrum Firms of different stages and in different industries have vastly different capital needs. Successful business finance entities have programming capable of serving a broad spectrum of capital needs. CDFA refers to the breadth of programs that serve multiple businesses as the development finance toolbox. 44 From bonds to loan programs to tax credits to support services, each different type of tool serves a different, necessary purpose in supporting a region s economic development. The comparison state entities largely reflect this best practice. CHFA utilizes bonds, multiple tax credits and several lending and credit enhancement programs. FAME provides bonds, New Markets Tax Credits and a variety of general and targeted lending programs. DBED operates a broad range of venture capital, incubators, bond finance, tax incentive and lending programs. Washington Commerce offers tax incentives, venture capital and lending programs. Economic development entities do not need to provide a full range of services in house. To varying degrees, each of these organizations has partnerships, or at least shared responsibility, for development finance with other state, local and private entities to provide additional services and programs. At the end of the day, the region s economic development efforts will be successful if businesses have easy access to the support they need whether that means they work with one partner or several. Data Collection for Impact Analysis Effective decision-making is informed by program data, as was discussed in the Demand/Supply Match Analysis. The best organizations are able to provide both qualitative and quantitative data in support of their programs to help ensure accurate, meaningful and persuasive analyses. In an era when governments are more transparent and have fewer resources, managers need to be able to provide this level of justification for their programs. Data collection should have at least three purposes: evaluating partners, demonstrating outcomes and assessing return-on-investment. Partner evaluations enable programs to reward effective service providers, encourage mid-tier providers and either develop or remove underperforming entities. Having data to support these evaluations helps programs demonstrate fairness in their dealings with partners. The purpose of outcome and return-on-investment analyses is entirely about internal and external program justification showing whether resources are being used effectively, clarifying whether programs should expand or contract and proclaiming successes to stakeholders. 44 Rittner, T. (2009). Practitioner s Guide to Economic Development Finance. Columbus, OH: Council of Development Finance Agencies. Benchmarking State Business Capital Programs 79

80 The U.S. Department of Treasury s SSBCI has encouraged many states to begin tracking these metrics for lending and investment programs. Loans by partnering financial institution, private leverage per public dollar and jobs created the latter two can also be calculated on a per-partner basis are key data points required by the Treasury. Additional analysis on this information can go a long way toward justifying programs without significant administrative overhead. Loan Fund Risk Management Business finance programs must carefully balance lending risk with the judicious use of public resources. Being able to maintain a high risk appetite (relative to commercial lenders) is one of the best services public loan funds can provide for regional economic development. The unfortunate reality, however, is that high program losses rarely translate well into the news media or general public. Therefore, programs must become skilled at managing the risk they do assume through their loans. The following four recommended practices provide risk management guidance for economic development loan funds. Review of Outstanding Loans Regular reviews of outstanding loans is a critical component of staying ahead of potential problems in a loan fund. A thorough review process includes both acquiring updated financial statements from the borrower and actually communicating with, if not visiting, the borrower to gain a better understanding of the business or project s performance. This process is obviously staff-intensive, and some programs therefore collect financials for all loans but only visit large or troubled borrowers on a regular basis. Strictly from a fiscal perspective, the purpose of the review is to identify potential problems with a borrower s ability to repay a loan before payments start appearing late, or not at all. This process can provide an additional economic development opportunity, as staff may see signs during the review that the business would greatly benefit from additional program support, such as technical assistance, export opportunity development, or a working capital loan. When these elements are combined, regular loan reviews is be both good practice and good policy. Annual reviews of all loans, with special attention for large or troubled loans is the industry standard. DBED additionally conducts an internal review of loan performance on a monthly basis. Washington Commerce relies upon its commercial lenders to conduct loan reviews. Both FAME and CHFA follow an annual approach to thoroughly update the initial underwriting analysis. FAME s policies provide a detailed standard. The organization collects financials, for both the business and the individual borrower, on all loans annually. For loans where FAME has provided at least $250,000, the organization re-assesses cash flow and collateral. If these loans are serviced through a commercial lender, then FAME requires a copy of the bank s review. Loan Risk Rating Establishing a ready index of anticipated risk is an important element of risk management. Most loan funds use risk rating to develop this index. A standard risk rating process evaluates loans on a 1-5 scale based on expected ability to make payments, collateral value and related factors. 45 This process serves two purposes. First, the program has an early and recorded concept of which borrowers are likely to require additional attention. Second, the program has an improved assessment of when outstanding 45 Federal Deposit Insurance Company. (2012). Asset Quality. RMS Manual of Examination Policies. Retrieved 8/2014 from: Benchmarking State Business Capital Programs 80

81 loans are likely to be repaid with more risky loans assumed to be repaid slower than terms alone would suggest. The risk rating process therefore enables the organization to more accurately predict and account for program expenses and available funds, factors that become increasingly important as the fund reaches higher levels of utilization. The standard practice for risk rating loans is on an annual basis. The practices of the comparison states had some variation. DBED s procedures for assigning risk ratings is program-dependent. Washington Commerce relies entirely on commercial lenders, who almost certainly perform their own risk analysis on a regular (e.g., annual) basis. Two of the four comparison organizations, CHFA and FAME, assign updated risk ratings on all loans as part of their regular annual loan review. Specialists to Service Problem Loans Underperforming loans require a disproportionate amount of program resources. Following up with delinquent borrowers may take substantial staff hours, in addition to travel to the project site, mailing costs and the potential for legal fees. This causes a potential struggle for loan servicing staff, who need to be attentive and responsive to both the easy and difficult customers. The temperament for dealing with performing loans and problematic loans may also be somewhat different. These factors greatly contribute to the practice of lenders to employ staff specifically to address problem loans. By having a dedicated loan workout staff, the main servicing staff can continue to focus on the majority of their clients, while the underperforming loans receive the special attention they need. This practice is employed by all three of the comparison organizations that service their own loans: CHFA, FAME and DBED. Loan Rates Priced for Loan Risk One of the most important reasons to identify a loan s risk is so that the loan can be priced accordingly. Loan funds are generally created with the intention to recycle and grow the fund over the course of multiple loan and repayment cycles. Even before accounting for operational costs, write-offs can quickly limit a fund s ability to recycle. In order to balance against losses, a fund must set interest rates that price this risk and therefore continue to grow the fund, over and above the expected write-offs. Economic development loan funds tend to struggle with this recommended practice. Most programs prefer to keep their money as inexpensive as possible. This policy position helps the program provide the greatest access to capital for businesses and projects through the fund s footprint. Unfortunately, underpriced interest rates set the program up for one of two likely outcomes: a fund that declines in value as repayments fail to keep pace with losses or a program that takes on very limited risks in order to secure the longevity of the fund. Neither program outcome is an ideal driver of development. Nonetheless, many business finance organizations maintain low rates for their programs, rather than relying on the fact that they are providing capital access to rejected businesses as the justification for the lending program. Ultimately, business finance programs should price according to risk, which requires an interest rate policy that includes a sufficient range of prices, rather than being tied to a specific index. This enables the same program to provide low-cost capital to projects that are low-risk and also provide capital, albeit at a higher rate, to projects that are a higher risk to the fund. There are political complications to Benchmarking State Business Capital Programs 81

82 this approach organizations may face pressure to provide lower rates to risky projects with large economic impacts but the approach is correct from fiscal and economic development perspectives. Benchmarking State Business Capital Programs 82

83 Methodology for Portfolio Outcome Comparison The coverage provided through Oregon business finance programs compares very well to the other states identified in this analysis. The State Comparison Matrix on page 75 uses six comparison areas across the four states, and the business finance division has an equal number of areas where the state compares favorably, comparably and weakly. This performance is made stronger when considering that Colorado, Maine and Maryland are recognized throughout the country for their development finance programs. Business Oregon is certainly among this esteemed company. In addition to measuring the coverage provided through business finance programs, Oregon is understandably interested in measuring the strength of its programs portfolios against other states. This analysis is more difficult to achieve. Portfolio data is not always publicly available, and certainly not in a comprehensive manner. At most, agencies may public topline numbers for program performance, but this is not a requirement, or selected option, by many entities. For this reason, Business Oregon will need to plan a methodology for portfolio comparisons. The strongest effort currently being made to benchmark small business capital access programs is by the U.S. Department of Treasury s SSBCI office. One of the SSBCI program requirements is that states must report information on use of funds and individual loans. The reporting is limited to programs and loans supported with federal funding, but this data nonetheless represents the broadest source of reporting on public small business finance program performance. Variables available in the data included number and size of loans, losses, fund size (at least the federal portion of the fund), jobs created and supported, and private leverage per federal loan dollar. Access to this data would provide sufficient information to establish effective benchmarks for program performance. There are also significant limitations to the Treasury s SSBCI data. The most significant factor is that public direct lending programs are not included, unless the loan is made in conjunction with a private loan. The benchmarks from SSBCI data would therefore be more relevant for Oregon s CAP and CSP than for the state s direct lending programs, such as EDLF and OBDF. Furthermore, the data includes loans made by Community Development Finance Institutions (CDFIs), which can function as both program operators and commercial lenders within SSBCI. The lending goals of CDFIs may not compare directly to those of a public authority. Despite these limitations, the Treasury s SSBCI data provides the most likely opportunity for Business Oregon to benchmark program outcomes to other states. The Treasury has thus far elected only to publish results in the aggregate, either at the national level or across categories of programs. For example, a national report 46 revealed several broad outcomes. The average size of program loans was $319,000, although the majority of loans were under $100,000. The average loan created or retained nearly 11 jobs and leveraged approximately $7 in additional private lending. For reasons discussed in the Portfolio Analysis and above, comparing these numbers directly to Business Oregon s performance is difficult, but the results provide the beginning of a standard. In order to establish a reasonable benchmark, Business Oregon will need access to the data behind the Treasury s reporting on SSBCI. The data should be made available to participant states in order to help 46 Center for Regional Economic Competitiveness. (2014). Filling the Small Business Lending Gap: Lessons from the U.S. Treasury s State Small Business Credit Initiative (SSBCI) Loan Programs. Retrieved 9/2014 from: Benchmarking State Business Capital Programs 83

84 improve program outcomes and the efficient use of federal funds. With access to the program and loan data, Business Oregon can then create benchmarks on a per-program basis. The per-program metrics are important for two reasons. First, states with non-replicable structures could be removed from the analysis. Second, per-program comparisons level the differences in objectives among programs, such as between a CAP and a subordinate loan. As a starting point, loans made, loan amounts, jobs supported, private leverage and program losses would be useful variables for analysis. Benchmarking State Business Capital Programs 84

85 Benchmarking State Business Capital Programs Section A: Portfolio Analysis Section B: Demand / Supply Match Analysis Section C: Alternative Coverage Assessment Section D: Recommendations Benchmarking State Business Capital Programs 85

86 Coverage for Phases of the Business Life Cycle Evaluation Oregon business finance programs provided support to thousands of businesses at many stages of development. The majority of these programs provide relatively large loans intended for relatively established businesses. As a result, the Department s coverage of the business life cycle is much stronger in the late growth phase (or decline) than for emerging or early growth businesses. While early-stage coverage is a weakness for Oregon business finance, this coverage is not lacking from Business Oregon as a whole. The Oregon Growth Board is tasked with leveraging state resources to improve capital access for new, high-growth companies. Recommendation Business Oregon should continue to expand capital access programs for emerging businesses. This recommendation could be fulfilled by developing the Department s current pilot program into a full business finance program. The pilot provides royalty-based rates for emerging companies that are not able to pay higher traditional rates and are not able or interested to provide equity positions. Royalty financing enables a company to pay a relatively lower interest payment by providing the lender with a portion of sales revenues. Oregon business finance has made six loans for $875,000 through its royalty loan pilot program to date. The Department should evaluate these loans and consider the costs and benefits of implementing the program as a full offering. The Department should also investigate the need and appetite for expanding state-supported seed or venture capital programming in conjunction with the Oregon Growth Board. Opportunities could include co-investing in funds, establishing loan programs to work in conjunction with Growth Board clients, or simply ensuring that these clients receive information about, and access to, supportive business finance programs like OTPP and STEP. Action Items The following actions would help Oregon business finance implement the recommendation: Complete royalty finance pilot Evaluate pilot's benefits v. real and opportunity costs If merited, prepare to launch the royalty financing program Benchmarking State Business Capital Programs 86

87 Diversification of Risk Evaluation Oregon business finance programs have very low losses and are therefore strong financial assets for the Department. Program losses, particularly for OBDF and CEF, actually suggest that Business Oregon may have a risk appetite that is somewhat more conservative than necessary. Recommendation Business Oregon should put a higher portion of its available funds to active use in promoting capital access for traded sector businesses. Oregon business finance programs are remarkably effective at making responsible loans and promoting desirable economic development benefits. The Department has been efficient in delivering these services, particularly with the OBDF program, which has approximately 40% of its total value held in reserve. These reserves play an important role in protecting against potential losses, facilitating the program s role in counter-cyclical lending, and generating operating revenues for the Department. However, these benefits can be weighed against the economic development benefits of providing increased capital access for the state through some combination of reaching new classes of borrowers, assuming increased risk and launching new business finance programs. Business Oregon should adopt policies enabling business finance programs to support loans to riskier borrowers and projects. Adopting more risk will enable the Department to reach additional businesses and projects capable of providing employment and investment opportunities for the state. More risk will also mean that Oregon business finance programs will experience higher loss rates. An analysis of additional losses against the economic benefits of the gains will help Business Oregon decide on an appropriate level of increased risk that is worth pursuing. So long as flexible rates can be used to help cover losses and the state s loan-tovalue ratios remain reasonable, the program portfolios will continue to serve as strong assets. NOTE: A change in risk appetite must occur in conjunction with the flexibility to assign loan rates and terms according to risk, rather than program standards. Benchmarking State Business Capital Programs 87

88 Action Items The first recommendation can be achieved through any of the marketing, risk and program recommendations made in this section. The following actions would help Oregon business finance implement the risk recommendation: Seek authorization for rate and term flexibility Acquire approval to maintain a greater risk appetite in business finance programs Develop model to adequately price loan rates based on loan risk Evaluate program changes to measure effectiveness Begin supporting loans to higher-risk borrowers and projects Work with lenders and borrowers to explain program policy changes Benchmarking State Business Capital Programs 88

89 Competitive Advantages and Disadvantages Evaluation Oregon business finance programs compared well with the other state programs analyzed in this report. The advantages held by Oregon are generally in the areas of manufacturing support and coverage through lending programs. The primary disadvantage is in the area of innovation support. Recommendation Business Oregon should develop procedures to monitor the performance of other state finance programs. This information would enable the Department to better understand the quality of its offerings relative to competing states. As discussed in this report, there are currently serious data limitations to such an endeavor, but the value of the analysis would justify some effort in this direction. A dashboard report of the outputs of Oregon business finance programs and comparable states would be a particularly accessible format for a report of this nature. Metrics to be considered are: (a) participating lenders, (b) geographic coverage, (c) jobs supported, (d) private leverage and (e) industry coverage. Action Items The following actions would help Oregon business finance implement the recommendation: Determine outcome metrics that matter to Business Oregon Identify accessible source of state program data and establish metric benchmarks Develop dashboard report for Oregon and comparison state outputs Establish procedure to regularly collect comparison data Benchmarking State Business Capital Programs 89

90 Market Opportunities Evaluation While providing at least some coverage for nearly all sectors of the state economy, Oregon business finance programs have particularly strong coverage for manufacturers and for growth-stage companies. Business Oregon has clear market opportunities to expand its role in the state by (a) providing further coverage for innovative and new businesses and by (b) expanding coverage to service industries. Recommendations Business Oregon should provide further coverage for innovative and new businesses. Business Oregon should expand its program coverage to businesses and projects in the service industries. These changes would enable the Department to reach important sectors of the state economy more effectively. Innovative businesses can create jobs and bolster the state s efforts to cultivate the High and Clean Technology industries. Service industries tend to provide relatively high-paying jobs, so furtherassisting these sectors should move the Department further towards its overall mission. Action Items Business Oregon can act upon the recommendation to provide further coverage for innovative and new businesses by launching a finance program aimed at emerging businesses (see page 82). The following actions would help Oregon business finance implement the recommendation to expand coverage to services industries: Assess high-target service sectors from wage, market analysis Implement campaign to market CAP to services sector businesses If merited, implement and market new program policies Evaluate impact of expanding OBDF, CEF to support service sector Benchmarking State Business Capital Programs 90

91 Program Refinements Evaluation Oregon business finance programs are very strong. The portfolios are fiscally healthy. Program coverage is fairly diverse. Outcomes are robust and in alignment with the Department s mission and vision. Nonetheless, a few, relatively small changes could further strengthen these programs. Recommendations Business Oregon should update its program policies to allow finance programs to have rates and terms according to project risk. This change would enable the programs to adopt a more aggressive risk appetite without unduly threatening the fiscal health of the portfolios. EDLF and some OBDF funds already have this capability through statutory requirements, and this change therefore only needs to occur at the policy level. Note that the Department does not necessarily need to begin changing its pricing or risk appetite to meet this recommendation, which is instead about developing a clear right to have such flexibility. Business Oregon should refine its risk rating procedures to include all loans for all programs and record these ratings into its loan tracking information system. This change is a recommended practice that would provide the Department with a greater understanding of its borrowers and provide greater information and protection should the programs expand to more risky projects. Action Items Actions toward the risk pricing recommendation are included with the Diversification of Risk recommendation (see page 83). The following actions would help Oregon business finance implement the risk rating recommendation: Develop a uniform policy for risk rating and recording Train staff on risk rating procecures Begin operating under the new policy Benchmarking State Business Capital Programs 91

92 Credit Enhancement Tools Evaluation Oregon business programs provide many different options to address a number of credit needs. If the Department wanted to further expand this portfolio, there are credit enhancement programs that could provide additional benefits for state projects and businesses. Recommendation Business Oregon should explore the benefits of a linked deposit program (LDP) for the state. LDPs are credit enhancement programs that use state deposits to buy down the interest rates on commercial loans. This could be a model that would leverage the unused portions of other program s portfolios without directly taking on additional liabilities. Business Oregon should explore the benefits of a bridge loan program for the state. Bridge loans help projects that have known capital arriving in the future (e.g., SBA 504, equity) begin work sooner. Several states have found these programs helpful for advancing economic development, particularly for projects that include new construction. Action Items The following actions would help Oregon business finance implement the recommendation: Interview lending partners about benefits of and need for additional programs Review existing models for sample program policies Implement pilot credit enhancement program If merited, launch full credit enhancement program Evaluate the pilot's benefits against hard and opportunity costs Benchmarking State Business Capital Programs 92

93 Marketing Programs to Lenders & Businesses Evaluation Business Oregon has an excellent website that provides clear information on each of the business finance programs. The program selection widget is an outstanding example of customer education and service. Nonetheless, all economic development programs are difficult for general audiences to understand and that is when potential borrowers find out about the programs at all. Recommendation Business Oregon should develop an expanded marketing plan to reach more and new borrowers who could benefit from financial assistance. Business Oregon should explore expanding the language used to market the bond program. In order to identify more job- and investment-creating projects, the Department could benefit from a marketing strategy geared toward simplifying language and reaching new audiences of potential borrowers. The industrial bond program could specifically benefit from revamped language marketing industrial bonds and specific exempt facilities classes separately. Action Items The following actions would help Oregon business finance implement the recommendations: Work with existing borrowers to evaluate current marketing Identify sources of additional potential borrowers Develop language reflecting full bond finance options Test language with potential borrowers to test clarity Implement awareness plan Develop plan to update language and targets Update website, marketing materials, etc. with language Benchmarking State Business Capital Programs 93

94 Program Alignment with Mission: Self-Sustaining Programs Evaluation Oregon business finance programs are very strong with regards to sustainability. As has been mentioned earlier in this analysis, the state would experience benefits from allowing programs to partake in more risk, even if this meant increases losses for the programs. Recommendation Oregon business finance programs do not require changes to continue operated towards the goal of self-sustainability. As some of the more progressive recommendations are adopted, the Department will need to continue to monitor the fiscal strength of its programs. Significant policy changes to program rates and terms, as well as the launch of new programs, require approximately five years to effectively evaluate. This extended window is necessary so that some revolution of funds and economic cycling can be experienced in the review period. Benchmarking State Business Capital Programs 94

95 Program Alignment with Mission: Job & Wage Impacts Evaluation Oregon business finance programs have supported thousands of jobs over the past decade, and many of these new and retained jobs have been in industries that pay above-average wages. The Department does not need to make any significant changes to the operation of its programs in this regard. However, better data collection on job and wage impacts could lead to stronger conclusions and more clearly suggest program refinements. Recommendation Business Oregon should consider expanding its data collection related to program outcomes. There are three specific types of outcome measures that would help the Department demonstrate effectiveness and make refinements. The first is post-financing job creation and retention, which reflects the real impacts of financing rather than intended impacts. The second is wage increases at the assisted business, which could be measured through unemployment insurance taxes or by collecting borrowers estimated salary expenses rather than jobs alone. The third, which is admittedly not related to job and wage impacts, is to more accurately record private leverage. Action Items The following actions would help Oregon business finance implement the recommendation: Identify measures that would help the Department measure outcomes Determine which measures could be collected without substantial client burden Establish systems to collect information for long term measures (e.g., wages) Begin collecting information for measures that can be gathered in the short term Benchmarking State Business Capital Programs 95

96 Program Alignment with Mission: Key Industry Support Evaluation Oregon business finance programs provide strong support for identified key industries. This is particularly true of advanced manufacturing. The Department may see stronger support across sectors by reaching into different aspects of its key industries supply chains: including research and development and professional services support. Recommendation Business Oregon should explore opportunities to increase its support for key industries by expanding the reach of business finance programs in other sectors. Action Items Actions toward the coverage for phases of the business cycle recommendation (see page 82) and market opportunities recommendation (see page 85) would also address the recommendation to expand the Department s reach into additional sectors. Benchmarking State Business Capital Programs 96

97 Acknowledgements CDFA would like to acknowledge the individuals who added their input to the development of Benchmarking State Business Capital Programs: Additional information on the lending programs and practices of comparison states was provided by Steve Johnson of Colorado Housing and Finance Authority, Sally Garand of Finance Authority of Maine, Harry Carroll of Maryland Department of Business and Economic Development and Jane Swanson of Washington Department of Commerce. Reviews and input on the report were provided by many members of the Business Oregon staff; CDFA would particularly like to recognize the review committee of Karen Goddin, Terry Hegle, John Saris and Donna Greene, as well as Oregon Growth Board Co-Chair Patricia Moss, for their time and feedback on the project. The Council of Development Finance Agencies is a national association dedicated to the advancement of development finance concerns and interests. CDFA is comprised of the nation's leading and most knowledgeable members of the development finance community representing public, private and nonprofit entities alike. For more information about CDFA, visit or info@cdfa.net. Benchmarking State Business Capital Programs 97