January 19, 2016
By Bob Coleman
Editor, SBA Hot Topic Tuesday
SBA Hot Topic Tuesday — SBA to Define CDC Economic Development Activities
One of the fallouts of SBA’s seizure of Frank Dinsmore’s EDF Resource Capital was the eye popping compensation earned by several CDC executive directors.
Two earned more than $1 million in our 2012 study. Four more earned between $500,000 and $1 million. To be fair, it should be noted the average CDC executive director compensation was $168,000. (I will update this study in the coming months.)
As a response to EDF Resource Capital, SBA famously instituted a number of CDC oversight changes, including an independent board of directors that is responsible for management’s compensation.
The latest CDC oversight issue is SBA’s attempt to define appropriate CDC “economic development” activities.
SBA is also asking for industry input how much a CDC should retain or invest of its revenues and “profits.”
This is the mechanism SBA will use to in an attempt to enforce “reasonable” executive director compensation.
Here are the questions. Mull it over and respond to a poll I will run tomorrow.
- What percentage of the CDC’s 504 Loan Program revenues do remaining funds typically represent at the end of the CDC’s fiscal year?
- Should SBA require CDCs to use a certain amount or percentage of their remaining funds to invest in other local economic development activity in the CDC’s Area of Operations? Please provide reasons for your response.
- If the answer to question 2 is yes, how should the amount required to be invested in other local economic development activity in the CDC’s Area of Operations be calculated? Some possibilities could include a percentage of the original loan amount of the CDC’s 504 portfolio, a percentage of the current outstanding loan amount of the CDC’s 504 portfolio, a percentage of the annual fees received by the CDC as a result of its 504 lending, or a percentage of the CDC’s remaining funds. Should the percentage vary depending upon the dollar value of the CDC’s portfolio or other factors? If so, describe how the percentage should vary and upon what factors.
- Should SBA require CDCs to retain a minimum amount as a reserve for future operations if there are any remaining funds? If not, why not?
- If the answer to question 4 is yes, how should the amount of a CDC’s required reserve be calculated? Some possibilities could include a percentage of the original loan amount of the CDC’s 504 portfolio, a percentage of the current outstanding loan amount of the CDC’s 504 portfolio, a percentage of the annual fees received by the CDC as a result of its 504 lending, or a percentage of the CDC’s remaining funds. Another approach would be to calculate the required reserve as a dollar amount equal to at least six months, but no more than 12 months, of staff and overhead expenses of the CDC.
- Should SBA limit the amount that CDCs may retain as a reserve for future operations? If not, why not? If yes, what would be a reasonable maximum amount to allow as a reserve?
- Should a CDC be able to decide that the reserve option would be a more prudent use of its remaining funds than economic development investments to ensure that it has the ability to “sustain its operations continuously”? Why or why not?
- Should SBA require CDCs to first apply any remaining funds to the reserve for future operations before using any remaining funds for investments? Please provide reasons for your response.
- What requirements, if any, should apply to a CDC’s remaining funds if it voluntarily decertifies or is removed from the 504 Loan Program? Should the CDC be required to invest these funds in local economic development activities prior to decertification or removal?
- What types of economic development activities should be included in the definition of “acceptable investments in economic development”? Are there any activities that should not be included in the definition? Examples of such acceptable investments in economic development could include loans, grants or other forms of direct financial support that are issued by the CDC for: (1) Other federal, state or local lending programs, such as microlending or revolving loan funds; (2) Small Business Development Centers; (3) business incubators; (4) industrial development; and (5) other non-profit economic development entities. Should the definition include business or technical procurement assistance provided by the CDC or paid for by the CDC?