Testimony before the DC City Council, Committee of the Whole, on Procurement Practices Reform Amendment Act of 2015
By Tim Hampton, WACIF
November 9, 2015
Good Afternoon Chairman Mendelson and Committee Members. My name is Tim Hampton and I am testifying on behalf of WACIF, a local nonprofit Community Development Financial Institution (CDFI) that provides flexible financing to local businesses and nonprofits.
I am here because the Procurement Practices Reform Act of 2010 is in danger of causing some unintentional collateral damage that would impede the development of affordable housing in DC.
This act placed bonding requirements on general contractors. However, it is virtually impossible for not-for-profit organizations to become bonded, because of the ownership structure and how their so-called profit margins barely exist. The only alternative, according to the act, is for the nonprofit developer to place a huge sum of cash in a bank, equal to half the value of the entire project. Needless to say, this is a very expensive proposition — one that nonprofits building affordable housing simply cannot afford.
Of course, the bonding requirement was added because the District wants surety that contractors will fulfill their obligations. I understand this. The problem is that the same financial standards are being applied to for-profit and non-profit entities, which just doesn’t make sense.
At WACIF I have underwritten loans to nonprofits, including Manna, and I know firsthand that you have to evaluate the creditworthiness of a nonprofit differently than for a for-profit company. WACIF’s credit policy, on which all our loans are based, states:
”The credit analysis of a nonprofit organization differs from that of a conventional business. Most fundamentally, the primary goal of non-profits is service delivery, not the generation of profits for owners and investors. Generally, the financial statements are on a fund accounting basis and there are no owners or guarantors … Traditional financial ratio analysis is not appropriate to the evaluation of nonprofit entities. As noted above, since non-profits are more concerned with service delivery than profitability, traditional ratios measuring liquidity, leverage, profitability, and activity are not entirely relevant.”
Unfortunately, the process of getting bonded relies heavily on those financial measures and ratios, plus getting a personal guarantee from the business owners, which isn’t even possible in the case of a nonprofit.
I understand that this “collateral damage” against nonprofit developers was unintentional. Luckily, there is still time to act before the damage is done.
There are other ways to measure a nonprofit’s creditworthiness and capacity to perform. I recommend that the council give DHCD flexibility in determining the requirements for nonprofit affordable housing developers, instead of requiring the same bonding and letters of credit as a for-profit.
If nothing is done to amend this provision, somewhat less affordable housing will be built, and it will cost more — millions of dollars more.
That waste can still be prevented, with your action.
-Tim Hampton, WACIF