Community Development Financial Institutions, which provide financial services to underserved populations, felt the shockwaves of the federal government shutdown this month.
Although the government reopened last week, the same issue could potentially be felt again on Jan. 15, 2014, when federal government funding again runs out.
Like just about any other business, CDFIs have felt the pinch of the shutdown, chiefly because many CDFIs rely on funding from the federal government, either through the CDFI Fund at the U.S. Department of the Treasury or the Small Business Administration or HUD.
Boston Community Capital (BCC), for example, finances and closes a good deal of solar panel projects throughout the Greater Boston Area. Chief Executive Officer Elyse Cherry said the organization has put about 900 solar panels on Boston area food banks alone – the solar panels help those nonprofits cut their energy costs, she explained.
Since many of BCC’s borrowers are financed in whole or in part by the federal government, if the shutdown were to continue into November, some of those borrowers could have trouble making next month’s payments.
Like many CDFIs, Dorchester Bay Economic Development Corp. relies on several funding streams that also include a nuns’ retirement fund, alongside money from the CDFI Fund and the SBA.
“We don’t do projects with only public money, but the public money is very important,” Executive Director Jeanne DuBois said.
Dorchester Bay also received the first third of $900,000 in SBA dollars before the shutdown, so they will still be able to make some small business loans. For now, though, Dorchester Bay will have to hold off on SBA 504 loans, larger loans that small businesses can use to purchase property or equipment.
That product is particularly important for helping longtime businesses and residents stay put in rapidly gentrifying neighborhoods, which is central to Dorchester Bay’s mission, DuBois said.
And Rebecca Regan, president of capital market companies at the Housing Partnership Network, said that although it hasn’t happened yet, the government shutdown could conceivably hamper access to Hardest Hit Funds from the U.S. Treasury that the organization would use to buy up foreclosed notes at auction through the Mortgage Resolution Fund, a foreclosure prevention program it leads with three other organizations.
Besides lack of access to otherwise reliable federal funding, CDFIs have also had to contend with something of a Kafkaesque nightmare: Cherry said that a number of projects have stalled simply because Boston Community Capital has been unable to secure employer ID numbers.
“Every time you start any kind of a new project, there are often entities to be incorporated, tax ID numbers are needed, bank accounts need to be opened. It’s just day-to-day operational issues,” she said. “The idea that the thing that’s’ holding something up is the failure to get an employer ID number, it’s just ludicrous. This is nothing but a ministerial act.”
Cherry worries that those operational issues may hold up a number of solar panel projects BCC is working on or even stop those deals from closing, particularly those deals that have an Oct. 31 deadline.
Wheeling And Dealing
The deal that may end the shutdown for now will most likely fund the government through mid-January, meaning it’s possible this kerfuffle could resume early next year.
“We’ll keep putting these packages together, but we just can’t guarantee people that we’ll get access to the capital right away and that could be difficult for the businesses,” DuBois said. “Not a lot of banks are still making enough loans. They may not be as flexible, or they may want that subordinate debt.”
DuBois isn’t too worried that funding will dry up at Dorchester Bay – they do, after all, have a good mix of private investors, including the nuns, who are always the first to invest in community development – and she said the organization may pursue partnerships with community banks as an alternate source of funding, if federal funds should dry up.
“We’re sufficiently capitalized, so this doesn’t have any catastrophic impact on us in the short term, but we have to worry about our borrowers and their ability to pay,” Cherry said, adding that the low-income communities that BCC and other CDFIs target will inevitably suffer the most during any economic downturn.
Moreover, the shutdown is distracting CDFIs from the more important issues at hand.
“Instead of focusing on how to get new projects accomplished, everybody instead is running around trying to plan for the contingencies,” Cherry said. “It takes an enormous amount of people’s efforts.”
Email: lalix@thewarrengroup.com
