FAIR HOUSING IN THE SUBURBS: 

THE ROLE OF A MERGED FLEET BOSTON IN 

THE DIVERSIFICATION OF THE SUBURBS 

Report to the Federal Reserve Board 

Concerning the Merger of BankBoston Corp. and Fleet Financial Group 

Presented on Behalf ofi 

Belmont Fair Housing Committee/Belmont Housing Partnership 

Town of Belmont 

Prepared and Presented by: 

Roger D. Colton 

Fisher, Sheehan & Colton 

Public Finance and General Economics 

34 Warwick Road, Belmont, MA 02478-2841 

6 17-484-0597 (voice) * * * 6 17-484-0594 (fax) 

roger@fsconline.com (e-mail) 

http://www.fsconline.com 

July 7, 1999 
One question presented to federal regulators by the proposed merger of Fleet Financial 

Group and BankBoston Corporation is whether the merged bank will adequately address 

the credit needs of the community. In assessing whether this will occur, there is a need 

to differentiate between the urban and the suburban communities. There is a significant 

focus of attention today on developing affordable housing in the urban community. That 

focus is clearly necessary. Unfortunately, however, there is much less attention focused 

on the suburbs. One of the next major steps that must occur in community development 

and fair housing is to facilitate the diversification of suburban communities. 

The data discussed below present a compelling argument on this need for diversification 

in the suburban community. The following discussion focuses on one slice of Boston’s 

suburbia, beginning with Belmont and radiating north and west eventually to capture the 

following ten communities: 

Belmont Winchester 

Waltham Arlington 

Lexington Bedford 

Woburn Burlington 

Sudbuly 

Concord 

Information on Lincoln was sought but was not available. The data show a need for: 

+ Greater socio-economic diversification; and 

+ Greater racial and ethnic diversification. 

Each of these needs will be documented below. In addition, a proposal for action to be 

imposed as a condition of the merger will be advanced. 

THE BELMONT FAIR HOUSING COMMITTEE 

The Belmont Fair Housing Committee is a Committee of the Town of Belmont. The 

Committee has been in existence since 1989. In the Policy Statement and Preamble to 

the creation of the Fair Housing Committee, the Belmont Board of Selectmen stated, 

amongst other things, that: 

IT IS HEREBY RESOLVED that the Town of Belmont affirms its 

commitment to ensure equal opportunity in housing for all persons who are 

or who desire to reside within its boundaries. In the conduct of all Town of 

Belmont programs and activities affecting the housing of town residents, the 
policy of the Town of Belmont shall be to promote equal choice and access 

to housing for all persons. 

* * * 

The Town of Belmont recognizes that discriminatory practices are 

detrimental to its citizens and to the future development of Belmont, and 

manifests its support for Fair Housing Legislation. The Town of Belmont 

shall take necessary action to remedy the effects of discrimination and 

prevent the growth of such practices. The Town will aggressively move to 

counteract any activities which restrict the potential for equal opportunity in 

housing. 

The Town of Belmont encourages all real estate brokers, agents, home 

builders, and developers, mortgage holders, and landlords to review 

operating practices and work with the Town in providing equal housing 

opportunities.“’ 

SOCIO-ECONOMIC DIVERSITY IN HOMEOWNERSHIP 

The first major credit need in the suburban community, as relevant from the perspective 

of this report, involves the promotion of socio-economic diversity. One lesson found in 

the available data is that the affordability of units is not the only barrier to homeownership 

in the ten communities studied. Homeownership is unavailable even when affordable 

homeownership opportunities exist. Information was obtained for each of the study 

communities on the number of units that are affordable at different levels of median 

income. This information shows that merely because a unit is affordable at a designated 

income level does not mean that it is actually occupied by a family (or household) with 

that income. “Occupancy distribution” has been discussed in detail elsewhere.v’ 

Not surprisingly, there are few affordable homeownership units available at the lowest 

levels of median income in the ten study communities. Belmont, for example, has only 

five homeownership units affordable for households at or below 30 percent of median 

income and only 24 units affordable at or below 80% of median income. Only Sudbury 

has fewer affordable homeownership units. Even the three communities with the most 

units that are affordable at or below 80% of median income (Waltham: 241; Burlington: 

\I\ Belmont Fair Housing Plan, Section I, Policy Statement and Preamble, adopted by Belmont Board of 

Selectmen (June 6, 1989). 

D\ Roger Colton (Spring 1997). “Fair Housing and Affordable Housing: Availability, Distribution and 

Quality.” Colloqui (Cornell University journal of planning). 

-2- 
2 17; Woburn: 2 13) do not have a large number units relative to the total size of those 

communities. This data is presented in Table 1. 

The lack of affordable housing in these suburban communities, however, is not the story 

to take notice of in this context. Even aside from the lack of available affordable units, 

even those affordable homeownership units that are available are not occupied by 

households with lower incomes. Of the 101 homeownership units affordable at 0 - 30% 

of median income in Bedford, for example, 0 are occupied by households with incomes 

at 0 - 30% of median income. Of the 106 homeownership units affordable at 50 - 80% 

of median income in Burlington, only 27 are actually occupied by households with 

incomes at or below 80% of median income. The totals for the ten communities are set 

forth in Table 2 below. 

As can be seen, the lack of a supply of affordable housing units is not the only barrier to 

socio-economic diversity in the ten study communities. Less than one-fifth of the units 

affordable at 0 - 30% of median income are actually occupied by households with those 

incomes (9 1 / 477 = 19.1%). Only roughly half of the homes affordable at 3 1 - 50% of 

median (116 / 241 = 48.1%), as well as at 51 - 80% of median (234 / 468 = 50.0%), are 

occupied by households with incomes at or below the affordable levels. 

It is often asserted that Boston’s suburban community lacks a greater socio-economic 

diversity because of the lack of affordable housing. The data above confirm that this is 

frequently the case. The data further show, however, that something more stands as a 

barrier to socio-economic diversification. The data present a compelling case that even 

when and where affordable homeownership units exist, they are not being purchased by 

households at lower incomes. To meet the needs of diversifying the suburbs, specific 

proactive steps are necessary. The need is more than simply to “avoid discrimination.” A 

proposal for action is presented below. 

-3- 
Table 1 

Availability of Affordable Homeownership Units vs. Occupancy of Affordable Homeownership Units 

By Percent of Median Income of Unit Occupant 

By Individual Community (10 Northwest Boston Suburbs) 

Units Affordable at 0 - 30% Median Units Affordable at 31 - 50% Median Units Affordable at 51 - 80% Median 

Income Income Income 

Bedford 

Sudbury 6 0 0 0 0 0 

Waltham 103 44 45 41 93 48 

Winchester 21 0 30 8 10 0 

Wobum 49 9 47 37 117 94 

SOURCE: 

U.S. Department of Housing and Urban Development, Comprehensive Housing Affordability Strategy (CHAS) CD-ROM (1993). 

-4- 
Table 2 

Total (10 communities) 

Availability of Affordable Homeownership Units vs. Occupancy of Affordable Homeownership Units 

By Percent of Median Income of Unit Occupant 

Cumulative Totals (10 Northwest Boston Suburbs) 

0 - 30% of median 31 - 50% of median 51 - 80% of median 

Affordable Occupied /a/ Affordable Occupied /b/ Affordable Occupied /cl 

477 91 241 116 468 234 

NOTES: 

/id Occupied by households with incomes at 0 - 30% of median income. 

lb/ Occupied by households with incomes at 0 - 50% of median income. 

ICI Occuuied bv households with incomes at 0 - 80% of median income. 

-5- 
RACIAL AND ETHNIC DIVERSITY IN HOMEOWNERSHIP 

The second major credit need in the suburban community, as relevant for purposes of this 

report, involves the promotion of racial and ethnic diversification. The data from the ten 

study communities used for this report show a lack of diversification even when 

controlling for income (as measured by percent of median income). Merely because units 

may be affordable to households of color’3’ does not mean that households of color are 

becoming homeowners in these suburban communities. 

Table 3 presents data on the distribution of African-American homeowners with incomes 

at or above 80% of median income. Table 4 presents data for Hispanic homeowners. 

The lack of racial and ethnic diversity in the ten study communities cannot be attributed 

exclusively to the lack of affordable housing availability. As Table 3 reveals, throughout 

the ten communities, the number of total African-American homeowners with incomes at 

or above 80% of median income is consistently less than one percent of the total number 

of homeownership units affordable at those levels. The performance is nearly identical 

relative to Hispanic homeowners at that income level. 

By definition, the price of housing is not the limiting factor in this analysis. The data is 

limited to housing determined to be affordable at 80% of median income or more with 

which to begin. The data is also limited to African-American and Hispanic households 

who have incomes of at least that amount. Something more than the mere unaffordability 

of homeownership is creating barriers to suburban homeownership for households of 

color. 

Consider the total numbers rather than simply the percentages. In Arlington, there are 

10,638 homeownership units affordable to households with incomes at or above 80% of 

median income, but only 41 African-American homeowners with incomes above 80% of 

median income. In Concord, while there are 4,393 homeownership units affordable above 

80% of median income, there are only six (6) African-American homeowners with 

incomes at that level. In total, while there are 65,628 homeownership units affordable at 

or above 80% of median income in the ten study communities, there are only 356 

African-American homeowners with those incomes in the ten study communities. 

The data is nearly identical for Hispanics. While there are 65,628 homeownership units 

affordable at or above 80% of median income in the ten study communities, there are only 

376 Hispanic homeowners with those incomes in those communities. 

U\ Persons of color are defined to include black (not of Hispanic descent) and Hispanic. 

-6- 
Table 3 

The Number of African-American Homeowners in Ten Northwest Boston Suburban Communities 

Controlling for Incomes at or Above 80% of Median Income 

Black (not Hispanic) Homeowners 

Units Available I I I 

I Above 80% I 81-95% I 95%+ I Total 8 1%+ Northwestern Boston Suburbs I Percent 

Arlington 10,638 0 41 41 0.4% 

I I I I I 

Bedford I 3,070 

Belmont 5,735 0 0 0 0.0% 

I I I I I 

Burlington I 6,013 

Concord 4,393 0 6 6 0.1% 

Lexington 8,476 6 58 64 0.8% 

Sudbury 4,304 0 45 45 1.1% 

Waltham 9,282 20 53 13 0.8% 

Winchester 5,690 11 25 36 0.6% 

Wobum 8,027 0 18 18 0.2% 

Total 10 Communities 65,628 37 319 356 0.5% 

SOURCE: 

U.S. Department of Housing and Urban Development, Comprehensive Housing Affordability Strategy (CHAS) CD-ROM (1993). 

-7- 
Table 4 

The Number of Hispanic Homeowners in Ten Northwest Boston Suburban Communities 

Controlling for Incomes at or Above 80% of Median Income 

Units Available 

Waltham 9,282 17 35 52 0.6% 

Winchester 5,690 0 6 6 0.1% 

Woburn 8,027 18 73 91 1.1% 

Total 10 Communities 65,628 41 335 376 0.6% 

SOURCE: 

U.S. Department of Housing and Urban Development, Comprehensive Housing Affordability Strategy (CHAS) CD-ROM (1993). 

-8- 

r- 
As can be seen, the lack of a supply of affordable housing units is not the only barrier to 

socio-economic diversity in the ten study communities. 

Identifying and seeking remedies for these barriers to diversity in homeownership is one 

essential element in fair housing lending. Fair housing lending involves more than merely 

“avoiding discrimination.” Fair housing lending has as its ultimate goals the elimination 

of the effects of any fair housing impediments identified through the lender’s analysis 

outside the lender’s control and the elimination of any identified impediments within the 

control of the lender. Translating these goals into objectives and programs is discussed 

below. 

PROPOSED REMEDY 

Based on the two credit needs of the suburban communities identified above, it would be 

appropriate for Fleet Boston to commit to working with the greater Boston fair housing 

community to develop, by the end of Calendar Year 2000, a Plan of Action to promote 

the diversification of the suburbs. This Plan would include a stated goal; supported by 

quantifiable, verifiable short-term (1 -year; 3-year) and long-term (Syear) objectives; a 

written work plan in furtherance of accomplishing the objectives, including an overall 

strategy and implementing tasks; an evaluation mechanism to determine performance 

relative to the stated objectives; and a review mechanism (including both internal and 

external persons) charged with utilizing the evaluation to formulate recommendations on 

modifications, as needed, to the Plan of Action should the objectives not be achieved. 

The Program Model 

This Plan of Action should be based on fundamental planning principles. Bank lending 

programs to further fair housing in the suburbs are but one type of a “program.“‘4’ Basic 

planning principles dictate that certain steps are as applicable to the planning and 

implementation of fair housing lending as they are to any program of any nature. The 

program design for a fair housing initiative to support diversity 

include the following steps: 

in the suburbs should 

1. Articulatiw the program goal: The program goal is the ultimate end-inview resulting from the program. 

\4\ “A ‘program’ may be any activity, project, function, or policy that has an identifiable purpose or set of 

objectives.” U.S. General Accounting Office, PerformanceMeasurement and Evaluation: Definitions and 

Relationships, Glossary, at 1 (April 1998). 

-9- 
2. Establishing one or more program obiective(s): Program objectives are 

to be both attainable and measurable. It is against program objectives that 

program performance is subsequently measured. 

3. Identifvinp the stratePy to accomplishinP the obiective(s): The “strategy” 

of a program is the overall direction in which the program intends to 

move.“’ 

4. Identifvinp one or more tactics through which to implement the 

stratem: Program “tactics” are the specific action steps through which a 

strategy is implemented. Tactics are those program elements which would 

be included in a work plan. A program may, and likely will, have multiple 

tactics to implement the strategy. 

5. Measurinp propram performance:‘6’ Measuring a program’s performance 

involves measuring outcomes.‘7’ Measuring outcomes is different from 

measuring outputs or activities. Neither output measures nor activity 

measures contribute to a determination of whether the program objective is 

being met. Accomplishment of an objective can only be measured through 

an analysis of program outcomes. 

6. Evaluatinp propram performance in 1iPht of the propram obiectives: 

Program performance should be measured relative to the program 

objective.“’ This involves creating a feedback loop. The feedback loop 

\5\ The strategy is important in that it is disconnected from tactics. A tactic may be effective and yet still not 

accomplish the program goal if the strategy is flawed with which to begin. 

\6\ “Performance measures may address the type or level of program activities conducted (process), the direct 

products and services delivered by a program (outputs), and/or the results of those products and services 

(outcomes).” Performance Measurement and Evaluation, supra. 

\7\ “Performance measurement focuses on whether a program has achieved its objectives, expressed as 

measurable performance standards.” PerformanceMeasurement and Evaluation, supra. As is thus evident, 

it is possible to know that a program reduces energy burdens and/or energy bills, without documenting what 

outcome that program result generates. 

\8\ “Performance measurement is the ongoing monitoring and reporting of program accomplishments, 

particularly progress towards preestablished goals.” Performance Measurement and Evaluation, supra. 

- lo- 
provides the planner with the ability to determine if the objective was met, 

and if not, what changes need to be made to improve performance.“’ 

These program planning steps are illustrated in Figure 1. Two important observations need 

to be made about this planning process. First, it is critical to distinguish between strategy 

and tactics. Even successful tactics fail if the strategy is flawed in the first place. If a 

strategy is in error, the effectiveness of the tactics becomes irrelevant, since successful 

tactics cannot be used within a flawed strategic framework to accomplish program 

objectives. Second, an appropriate strategy can fail due to unsuccessful tactics. Under 

these circumstances, the appropriate planning response is to determine whether the tactics 

had some underlying flaw, or whether they were poorly implemented. 

The Evaluation Model: OutcomesL’Vot Activities 

The model proposed above represents an important change in the approach to fair housing 

lending in the suburban communities. Rather than focusing attention on “activities” or 

“outputs” on the part of a merged Fleet Boston, the proposed program focuses instead on 

performance or “outcomes.” An outcome-based focus is not merely a different word for 

“quotas.” Outcome-based planning and evaluation is a recognized and growing planning 

tool for all types of program design and development. 

Of the performance measurement obligations that are increasingly being applied to both 

public and private programs today, perhaps best known is the Government Performance 

and Results Act of 1993 (GPRA). GPRA was designed to address the same conceptual 

issues a lender must address for its fair housing programs: “to grapple0 with how to best 

improve effectiveness and service quality while limiting costs.“‘lo’ GPRA was enacted 

in response to: 

the need to shift the focus of government decisionmaking and accountability 

away from a preoccupation with the activities that are undertaken. . .to a 

focus on the results of those activities. . . The key concepts of this 

performance-based management are the need to define clear agency 

missions, set results-oriented goals, measure progress toward achievement 

\9\ “A program evaluation’s typically more in-depth examination of program performance and context allows 

for an overall assessment of whether the program works and identification of adjustments that may improve 

its results.” Performance Measurement and Evaluation, supra. 

\10\ James Hinchman (Acting Comptroller General). (June 24, 1997). Managing for Results: The Statutory 

Frameworkfor Improving Federal Management and Effectiveness, at 1, Testimony before U.S. Senate 

Committee on Appropriations and Committee on Governmental Affairs (GAO/T-GGD/AIMD-97-144). 

- 11 - 
of those goals, and use performance information to help make decisions and 

strengthen accountability.“” 

The transformation to performance-based management is not easy under GPRA. But the 

substantial difficulties which federal agencies will face are much the same that Fleet 

Boston will face with its fair housing programs. As the U.S. General Accounting Office 

(GAO) has observed, one goal of the statute for the federal government is to: 

ensur(e) that agencies are managing to achieve results rather than just 

focusing on activities or processes. Many agencies have a difficult time 

moving from measuring program activities to establishing results-oriented 

goals and performance measures. The fundamental reason that this is so 

difficult is that, to manage on the basis of results, agencies must move 

beyond what they control--that is, their activities--to focus on what they 

merely influence--their results.‘12’ 

In this observation, one could replace the word “agencies” with the words Fleet Boston 

and the fundamental truth of the statement would still attend. 

Federal agencies have been provided substantial guidance on the aspects of GPRA that 

relate to the issue of definition of adequate and appropriate performance measures. The 

Executive Guide: Eflectively Implementing the Government Performance and Results 

Ac~“~’ states that its review of private, as well as state and foreign government agencies 

“that were successful in measuring their performance” had developed performance 

measures that were based on four characteristics: 

0 They were tied to program goals and demonstrated the degree to which the 

desired results were achieved; 

0 They were limited to a vital few that were considered essential for 

producing data for decisionmaking. “These vital few measures should cover 

the key performance dimensions that will enable an organization to assess 

accomplishments, make decisions, realign processes, and assign 

accountability.“‘14’ 

\l I\ Id. 

\12\ Id, at 8. 

\13\ 

\14\ 

Comptroller General of the United States, U.S. General Accounting Office, GAO/GGD-96-118 (June 1996). 

Id., at 25. 

- 12- 
0 They were responsive to multiple priorities, forcing managers and 

policymakers to take “competing interests into account and create incentives 

for managers to strike the difficult balance among competing demands.““5’ 

and 

0 They were responsibility-linked to establish accountability for results. “A 

clear connection between performance measures and program offices helps 

to reinforce accountability and ensure that, in their day-to-day activities, 

managers keep 

achieve.“‘16’ 

in mind the outcomes their organization is trying to 

As implementation of GPRA has made clear: 

Even the best performance information is of limited value if it is not used 

to identify performance gaps, set improvement goals, and improve results. 

. .[S]uccessful organizations recognize that it is not enough just to measure 

outcomes. Instead, they must also assess the main processes that produce 

the products and services that lead to outcomes. Such organizations 

typically assess which steps or activities of a process are the most costly, 

consume the most labor resources, and take the most time to complete. By 

analyzing the gap between where they are and where they need to be to 

achieve desired outcomes, management can target those processes that are 

in most need of improvement, set realistic improvement goals, and select an 

appropriate process improvement technique.“” 

As can be seen, a crucial element of performance management is, indeed, establishing and 

reporting the desired goals and outcomes so that gaps in performance can be identified and 

rectified. There should be monitoring, reporting, evaluation and feedback within the Fleet 

Boston fair housing planning process, with program modifications flowing therefrom as 

appropriate. An appropriate feedback loop is illustrated in Figure 2.‘18’ 

\15\ Id., at 25. 

\16\ Id. 

\17\ Johnny C. Finch (Assistant Comptroller General) and Christopher Hoenig (Director, Information Resource 

Management/Policies and Issues). (June 20, 1995). Managing for Results: Critical Actions for Measuring 

Performance, at 9, testimony before the U.S. House Subcommittee on Government Management, 

Information and Technology, Committee on Government Reform and Oversight. 

\18\ This analysis does not set forth proposed objectives and performance indicators since establishing those 

objectives and indicators is an essential step in the program planning process. Fleet Boston, in cooperation 

with the local fair housing community, should develop both the objectives and the performance indicators. 

- 13 - 
CONCLUSIONSANDSUMMARY 

Based upon the above discussion, the following conclusions are appropriate: 

1. Fair housing lending requires more than simply avoiding discrimination. It 

involves seeking to eliminate the effects of any fair housing impediments 

outside the lender’s control and to eliminate any identified impediments 

within the control of the lender. 

2. Two major credit needs have been identified for Boston’s suburban 

community. The first major credit need in the suburban community, as 

relevant from the perspective of this report, involves the promotion of socioeconomic diversity. The second major credit need in the suburban 

community, as relevant for purposes of this report, involves the promotion 

of racial and ethnic diversification. 

3. The data confirm that Boston’s suburban community frequently lacks a 

greater socio-economic diversity because of the lack of affordable housing. 

Something more, however, stands as a barrier to socio-economic 

diversification. Even when and where affordable homeownership units 

exist, they are not being purchased by households at lower incomes. To 

meet the needs of diversifying the suburbs, specific proactive steps are 

necessary. 

4. The lack of a supply of affordable housing units is not the only barrier to 

socio-economic diversity in Boston’s suburban communities. The data from 

the ten study communities used for this analysis show a lack of 

diversification even when controlling for income (as measured by percent 

of median income). Merely because units may be affordable to households 

of color does not mean that households of color are becoming homeowners 

in these suburban communities. By definition, the price of housing is not 

the limiting factor in this analysis. Something more than the mere 

unaffordability of homeownership is creating barriers to suburban 

homeownership for households of color. 

5. Based on the above conclusions, it is appropriate to impose as a condition 

of this merger, the requirement that Fleet Boston commit to working with 

the greater Boston fair housing community to develop, by the end of 

Calendar Year 2000, a Plan of Action to promote the diversification of the 

suburbs. This Plan would include a stated goal; supported by quantifiable, 

verifiable short-term (l-year; 3-year) and long-term (5year) objectives; a 

- 14- 
written work plan in furtherance of accomplishing the objectives, including 

an overall strategy and implementing tasks; an evaluation mechanism to 

determine performance relative to the stated objectives; and a review 

mechanism charged with utilizing the evaluation to formulate 

recommendations on modifications, as needed, to the Plan of Action should 

the objectives not be achieved. 

BACKGROUND OF PERSON PROVIDING COMMENTS 

Roger Colton is a member of the Belmont (MA) Fair Housing Committee (a committee of local government) and 

the Belmont Housing Partnership. Colton is also a member of the Advisory Committee of the Fair Housing Center 

of Greater Boston. 

An attorney and an economist, Colton is a principal in the research and consulting firm of Fisher, Sheehan and 

Colton, Public Finance and General Economics (FSC). FSC has prepared fair housing analysis of impediments 

studies for local governments. In addition, Colton is a member of the national LZHEAP Advisory Committee on 

Managingfor Results, for the U.S. Department of Health and Human Services, Administration on Children and 

Families (HHSACF), charged with developing outcome-based performance standards for the federal Low-Income 

Home Energy Assistance Program (LIHEAP). Under contract to the U.S. Department of Labor, Occupational Safety 

and Health Administration (OSHA), Colton prepared an ex ante performance review of OSHA’s proposed standard 

to control the occupational exposure of workers to tuberculosis in homeless shelters. 

- 15 - 
FIGURE 1: BASIC PROGRAM PLANNING STEPS 

1. Articulate the program goal 

The program goal is the ultimate end-in-view resulting from the program. 

Illustration: To maintain better contacts within one’s family. 

2. Establish one or more program objective(s) 

Program objectives are to be both attainable and measurable. It is against program objectives that program performance is subsequently measured 

Illustration: To be home for holidays. 

3. Identify the strategy through which to accomplish the objective(s) 

The “strategy” of a program is the overall direction in which the program intends to move. 

Illustration: To acquire frequent flyer miles to fund airplane tickets for holiday trips home. 

4. Identify one or more tactics through which to implement the strategy 

Program “tactics” are the specific action steps through which a strategy is implemented. Tactics are those program elements which would be 

included in a work plan. A program may, and likely will, have multiple tactics to implement the strategy. 

Illustration: To limit all business trips solely to a single airline to increase the accumulation of frequent flyer miles. 

- 16 - 
FIGURE 1: BASIC PROGRAM PLANNING STEPS 

5. Measure program performance 

Measuring performance involves measuring outcomes, a process that differs from measuring either outputs or activities. Neither output measure s 

nor activity measures contribute to a determination of whether a program objective is being met. Accomplishment of an objective can only be 

measured through an analvsis of oroaram outcomes. 

Illustration (outcome measure): Was I home for New Years Dav. Labor Dav. Fathers Dav? I 

I Illustration (activitv measure): Did I flv all mv business trins on one airline? I 

I Illustration (output measure): Did I accumulate sufficient frequent flyer miles to fund a trip home for the holidays? I 

6. Evaluate program performance in light of the program objectives 

Program performance should be measured relative to the program objective. This involves creating a feedback loop. The feedback loop 

nrovides the planner with the ability to determine if the objective was met, and if not, what changes need to be made to improve performance. 

Illustration (flawed strategy): I flew enough business trips on one airline to accumulate sufficient miles for an airline 

ticket, but my home town does not have an airport. 

I Remedy (change strategy): To dedicate one week of vacation per year to be home for Christmas. I 

I Illustration (flawed tactic design): I flew 100% of my business trips on one airline, but I took only three business trips. I 

Remedy (change tactics): To purchase all business supplies using a credit card offering frequent 

flyer miles. 

Illustration (flawed tactic implementation): I flew enough business trips on one airline to accumulate sufficient miles for 

an airline ticket, but the airline on which I took all my business trips does not fly to my home town. 

Remedy (improve implementation): To change airline on which I fly business trips. 

- 17 - 
I 

* 

1 Task 1 1 Identify “Thing to be Controlled”: 

Diversification of the suburbs 

Objective # 1: Objective #2: 

Socio-economic diversity Racial/ethnic diversity 

Indicators 

#I-#3 

Indicators 

#4 - #6 

I I 

1 Task 4 1 

I 

Measure base case performance 

of “Thing to be Controlled” 

I 

Measure actual performance 

of “Thing to be Controlled” 

+____ 

-______________-____---~ 

Compare to pre-determined 

performance standard 

Determine whether material variance 

exists between actual performance 

and pre-determined standard 

Determine root cause of whatever 

material variance exists (if any) 

Initiate corrective action as necessary to begin anevv ---+ 

address root cause of material variance _______________-____--- 

FIGURE 2: USE OF PERFORMANCE INDICATORS IN EVALUATING PROGRAM PERFORMANCE 

I Task 5 I 

1 Task 6 ] 

- 18- 
, . 

South End Neighborhood Action Program 

South End Neighborhood Service Center of ABCD 

554 Columbus Avenue Boston MA 02118-l 116 

Phone: (617) 267-7400 Fax: (617) 336-8678 

July 6, 1999 

Robert M. Brady, Vice President 

Federal Reserve Bank of Boston 

P.O. Box #2076 

Boston, MA 02 106-2076 

. _~ 

BY FACSIMILE AND MAIL 

Dear Mr. Brady, 

I appreciate the opportunity to present comments at the public meeting regarding the 

proposal by Fleet Financial Group, Inc. to merge with BankBoston Corporation. I 

understand that I shall be on a panel from 6:30 - 7:00 P.M. on July 7’. 

Attached is a copy of my comments. 

Sincerely, ... , 

President: 

JeanetteBoone 

vice President: 

Ralph Cooper 

Pat Cusick 

Executive Director 

Members: 

Mary Chin 

Veronica Collier 

Mark Glover 

Marilyn Hicks 

Dr. Muriel Knight 

Mariiyn Poston 

Executive Director: 

Pat Cusick 

cc. Senator Dianne Wilkerson 

Yun al Community Advocacy Robert M. Coard, President & CEO, ABCD 
. 

Comments for the Public Meeting by the Federal Reserve Bank 

on the Proposed Fleet Financial Group/Bar&Boston Merger. 

Presented by Pat Cusick, Executive Director, SNAP 

My name is Pat Cusick, the Executive Director of the South End Neighborhood Action Program (SNAP) 

and, for the record, I reside at 521 Shawrnut Avenue in Boston. 

. ._~ 

My focus is, principally, on the area of home loans and’mortgages. The access to home ownership is more 

than shelter, more than a stabilizing force for families, more than neighborhood revitalization. 

Fundamentally, homeownership in the minority and low income community (LMI) is the sinking of roots in 

communities which have few roots and therefore are vulnerabIe. A portion of my neighborhood, Lower 

Roxbury has less than 5% homeownership, which is the least amount in the city of Boston. 

increase in the ainount of home loans and mortgages. 

We need an 
..^ 

. 

_ 

: ..:; ___i- .- - 

._. -. . _....’ _ 

(-hwffll,4hrt,~ap2 .Lerdiny Dara in Bo.sion 

,_: 

:_. 

‘.,. With the strong housing market; denial rates for whites, blacks md Latinos in 

‘_ ._. 

. . :. 1. Boston have dropped ova 35oi’o be&&n 1990 md 1997. Denial rata in Boston 

.. for minorities and low-income applicants zre aIso lower compared to nationwide 

‘_ -. denial rates. 

. . -.... 

- -- 

Much of the growth i.n mortgage company mz&er shx< can be arx%utsd 1~7 

nariona1 mort$a$e Gfqxnizs entsrin, n the Ro~?on market and sending mass 

mailings, eccording to Julie Connell!;, VP. of Com.mu&~ Relations for C&ens 

Bauk. . 

. 
Community Everience with the Principal 

While Boston has had a very mixed experience overall in the past seven years, 

we find cause for concern in the records of the merging institutions. 

Fleet’s record in providing access to homeownership is troubling. For example, 

. _~ 

Fleet Real Estate Funding’s conventional home purchase lending shows major disparaties in 

denial rates in cities across the country. In the Boston area, the comoanv denied 26% of applications from 

African Americans and 29 % from Latinos, compared to 11% for whites. 

Fleet’s record in making financial services affordable is also problematic. In 1996, Fleet settled discrimination 

charges with the US Department of Justice that it systematically overcharged minorities in its two New York 

area mortgage offices. In Georgia, Fleet Finance used “bird dog” salespeople to target up to 18,000 Georgians 

for high-rate mortgages , many of which led, predictably, to foreclosure. In 1997, in the New York area, Fleet 

Home Equitv USA denied every home improvement loan application it received from Latin0 homeowners. We 

must do much better than this. 

Given these concerns and the background of critical issues in Boston, what do we ask of our banking 

partners? 

First, we need mortgage Lending which allows families to stay in their own 

neighborhood-and to invest in their neighborhood. 

Second, we need home equity and home improvement Lendingprograms which help 

ensure that the family homestead can be passed on to the next generation. 

Third, we need small business Lending that helps ensure that neigbborboodr can sustain their Local infrastructure, while 

Local entrepreneurs are encouraged to continue investing their own blood, sweat and tears in their communities. 

Fourth, we need a Local bankingpresence in which bank employees Look Like thepeople in our neighborhoods and are 

hiredfrom our neighborhood+with a helping band in the area of training or education, zfneed be. 

We are concerned about this merger because the records of the parties give us pause. 

We have seen other me’rgers in which our communities lost out-for example, it has been reported 

recently that in the last two major bank mergers in Boston, home loan lending dropped by up to 

50%. Our only protection is to work out an agreement with Fleet/Boston, which is verifiable and whose 

essence in accountability. And, of course, the agreement must be signed. I would not be furnished any 

transactions with my bank without my signature. The community must have a signed agreement. 
TESTIMONY TO THE FEDERAL RESERVE BANK BY DAVID HARRIS, EXECUTIVE 

DIRECTOR OF THE FAIR HOUSING CENTER OF GREATER BOSTON 

REGARDING THE FLEET/BANKBOSTON MERGER, JULY 7,1999 

My name is David Harris and I am the Executive Director of the Fair Housing Center of 

Greater Boston. The Center is a membership organization promoting equal housing 

opportunities for all people throughout the greater Boston metropolitan area. Our service area 

includes the 150-plus cities and towns in Eastern Massachusetts and our activities center around 

advocacy, education, enforcement and legislation. We join others who have expressed concerns 

about the impact the proposed new bank will have on the fulfillment of our mission. While many 

of the discriminatory practices associated with Fleet may have occurred outside of 

Massachusetts, they betray an institutional culture which placed profit above all else, including 

trust and reputation, and conformance with fair housing laws. The Federal Reserve Bank must 

consider the kind of corporate citizen a new entity will become and, where such consideration 

raises questions, place specific requirements on any approval it grants. 

We are among the lOO-plus groups with whom the banks so proudly boast of meeting. 

While our meeting was cordial and the discussion open, we were distressed by the suggestion 

that we return at the end of the year to explore specific fair housing issues c&r the merger is 

complete and the new entity has consolidated. Given the history of housing discrimination in 

this country and Fleet’s chapter in that history, a fnrn, public and detailed commitment to fair 

housing must precede and not follow a merger. 

The banks have widely publicized their 14.6 billion dollar commitment “to the 

community.” We would like to expand the conversation to a broader notion of community. The 

Center holds that fair housing is a regional concern which demands local attention. The cities 

and towns in our service area vary greatly in terms of household income and housing mix Others 

today have discussed specific Community Reinvestment Act-inspired activities. Most of these 

are, appropriately, targeted at persons and communities of low to moderate income. Obviously, 

the new entity must make substantial and measurable commitment to serving these needs. But 

our scope goes beyond the CRA formula as a baseline and we believe the Federal Reserve Bank 
Teskvony of Fak HuuMg cSn?er of Greater Bosfon 

Ta fhe Federal Resen/e Bank Ju& i: 7999 

must look beyond that horizon as well. We know, for example, that with certain glaring 

exceptions, most cities and towns in the region remain predominantly white. We have analyzed 

1990 census household income data which reveal that the populations of color in the vast 

majority of cities and towns fall far short of what would be expected based on income alone. It 

is no accident that these are also the more affluent communities. The result is that the typical 

CRA-driven approach to “community” ignores most of the communities in the region. 

Data published by the Massachusetts Community and Banking Council in its report, 

Changing Patterns V: Mortgage Lending to Traditionally Underserved Borrowers and 

Neighborhoods in Greater Boston, 1990-l 997, underscore our concerns.. In addition to 

analyzing mortgage lending in the City of Boston, the study looked at two “rings” of 

communities outside the city. The study found that the share of loans received by blacks and 

Latinos fell between 1995 and 1997 and that the denial rates for blacks and Latinos exceed those 

of whites. Moreover, loans in the suburban rings were concentrated in several towns with a large 

number of low to median income census tracts, many of which have relatively large black and 

Latin0 populations. 

While data for individual banks are not reported, Fleet and Bar&Boston are included 

among the category of “large banks” who, according to the report, “accounted for a significantly 

larger share of loans to each of the traditionally underserved categories than they did of overall 

lending in each of the geographic areas considered” Though the data are aggregated and merit 

more detailed analysis, we surmise that the focus of these two banks - as well as other “large 

banks” -- is on the low-to-moderate income segment. But what of those people of color who 

seek homesin other communities? Who is serving them? Clearly it is possible that people of 

color are choosing not to apply for mortgages in every city and town. Indeed, these same data 

show that the large banks wrote relatively more mortgages to African Americans who are not 

low-to-moderate income in Milton and Randolph. 

These residential patterns may all be a matter of choice or they may also constitute a 

subtle form of steering. Both may be true. Or these patterns may reflect the failure of banks and 

other institutions involved in housing provision to take steps to affirmatively further fair housing. 

The new entity must take a leadership role in identifying impediments to fair housing in its 

market area. This goes beyond LMI. To be sure, affordability is an issue and no one is 

7 
Tes~~unyofFa/~Hoc/sli7gffterofGreaterB 

Tothefedera/ ffesen/eBank A&Z 7999 

suggesting the banks make bad loans or convince people to get in over their heads. On the other 

hand if a careful analysis indicates, as national data on wealth differentials between races 

suggest, that people of color have sufficient income but lack the accumulated wealth for certain 

housing markets, a bank may institute programs specifically designed to help such buyers create 

the necessary wealth. 

The Federal Reserve Bank should require the new entity to announce specific actions to 

affirmatively further fair lending in the metropolitan-wide area. The first such action must be a 

comprehensive review of the two banks’ policies, practices and procedures to identify possible 

impediments to fair housing, the results of which review will be made available to the public. 

This review should be conducted by internal and external analysts and analyze impediments 

within the lender’s control as well as more general impediments in the market. 

The Federal Reserve Bank should require the new entity to develop, by the end of 

calendar year 2,000, a Plun of Action to increase lending to persons of color and other protected 

classes throughout the region (rather than merely within LML census tracts). This Plan will 

include: quantifiable, verifiable short-term and long-term objectives; a written work plan to 

accomplish the objectives; and a review mechanism, including both internal and external experts 

charged with evaluating performance and formulating recommendations for modifications to the 

Plan. The new entity should include qualified fair housing organizations among its resources for 

meeting both requirements. Where no such organization exists, as is the case in Providence, for 

example, the new entity should take a leadership role in creating such an organization. 

The real cost of our proposal is f3rn and measurable commitment, but the benefit is a 

step toward credibility. A new entity with this particular history must take a leadership role, 

must do more than others; indeed, must set the pace for others. We are not so nai-ve as to think 

any business can take credibility alone “to the bank”; but what should be clear from the 

testimony today is that no business can hope to succeed without it. In terms of actual dollar 

costs, they are largely internal and will enhance performance. Moreover, any such costs pale by 

comparison to other commitments already made by the banks and to the costs of litigation and 

settlement of successful discrimination claims. 

The practice of effective fair housing is, or certainly should be, a basic element of good 

banking. Basic, but not simple. The practice requires lasting institutional commitment driven 

R 
Teshnony of Fak h’oushg Cen fer of Grea fer Boston 

To the Federal Resewe Bank Ju& Z 7999 

by honest and ongoing self-criticism. Effective practice does not occur in isolation, but is, by 

nature, cooperative and open. It depends upon developing and maintaining internal mechanisms 

as well as partnerships with external organizations across institutional lines - from public 

officials to non-profit agencies, from insurers to realtors. Of course creating these partnerships 

requires a basic element sorely missing from the proposal you are considering: trust. 

The Fair Housing Center will certainly be watching and, where indicated, investigating. 

But the Center is also available to assist in designing and implementing an affirmative fair 

lending strategy. 
July 7, 1999 

5 

TRINITYCHURCH 

INTHECITYOFBOSTON 

To: The Federal Reserve Bank of Boston 

From: Rev. William Barnwell of the Greater Boston 

Interfaith Organization (GBIO) 

GBIO is a large and active social reform 

organization consisting of about seventy-five faith 

communities, ten community development 

corporations, and five other community groups, 

across race, class, denomination, and geographic 

lines. Over four thousand people attended our 

founding assembly last November. 

I am here today to represent our organization, 

which has made affordable housing, especially for 

low-income people, its top priority. After many 

small group meetings my church, Trinity Episcopal 

Church, Copley Square, decided to make affordable 

housing our top outreach concern as well. 

We at GBIO and at Trinity Church believe that if we 

are not able to make housing available to all of 

our citizens, we will quickly become a one-class 

city, forcing most of our church members and other 

low to moderate income people into the distant 

suburbs. Not only would that make life extremely 

difficult for those persons, it would also have the 

effect of greatly diminishing the diversity of the 

city that we cherish so much. 

Specifically, GBIO urges that you approve the 

merger only if these conditions are met: 

Copley Square Boston, Massachusetts 02116 Telephone: 617-536-0944 Facsimile: 617-536-8916 
1. 

2. 

3. 

4. 

5. 

6. 

That you require a detailed written and signed 

reinvestment agreement. The idea that such an 

agreement not be signed is unthinkable to us and 

we believe should be unthinkable to banks that 

rely entirely on signed agreements with their 

customers. 

That the merger result in at least the same 

amount of benefits to low income areas that both 

banks have offered before the merger. 

That Fleet Bank convert its obligation for a 

loan pool to the Massachusetts Housing 

Partnership into an affordable housing grant 

(equity conversion). Here Fleet would be 

following the model of the Bank of Boston when 

they merged with Bay Bank. By our 

calculations, thirty to sixty million dollars 

would be available for affordable housing 

grants. This we believe would help many more low 

to moderate income families buy their homes or 

rent than a small reduction in 

would allow. 

That Fleet Bank and BankBoston 

commitments to the soft second 

programs that they made to the _ 

interest payments 

meet their 

mortgages 

community on May 

12- at Roxbury Community College in the amount 

of about one hundred million dollars. 

That the new bank extend the soft second 

mortgages to other parts of the state. 

That low to moderate income neighborhoods 

continue to have nearby branches of the new bank 

and that none 

the old banks 

neighborhood. 

be closed or sold unless two of 

were in the same immediate 
‘. ._j 

MassAlliance 

FIFTH ANNIVERSARY 

AT THE CENTER OF SMALL BUSINESS DEVELOPMENT 

Massachusetts Alliance for Small Contractors, Inc 

Bruce C. Boiling l Executive Director 

PUBLIC MEETING REGARDING THE PROPOSED MERGER OF FLEET 

FINANCIAL GROUP, INC. AND BANKBOSTON CORPORATION 

BRUCE C. BOLLING, EXECUTIVE DIRECTOR 

MASSACHWSETTS ALLIANCE FOR SMALL CONTRACTORS, INC. 

Testimony before the Federal Reserve Bank of Boston 

July 7,1999 

I45 South Street, Sixth Floor, Boston, Massachusetts 02 I I I l Phone (6 I7)556-2350 + Fax (6 17) 574-9003 + E-mail: MAalliance@aol.com 
MassAlliance 

_- ._.. -- ._.. .-. _-.-.-.-__--- 

FIFTH ANNIVERSARY 

A-t- THE CENTER OF SMALL BUSINESS DEVELOPMENT 

Massachusetts Alliance for Small Contractors, Inc 

Bruce C. Bolling l Executive Director 

MASSACHUSETTS ALLIANCE FOR SMALL CONTRACTORS, INC. 

INTRODUCTION 

The Massachusetts Alliance for Small Contractors, Inc. (MassAlliance) is a non-profit 

corporation that provides business-development and capacity-building services to small, 

minority, and women-owned business enterprises (M/WBEs). MassAlliance helps 

M/WBEs acquire the financial resources, technical capabilities, and management skills 

needed to successfully compete for projects in the construction industry, including: 

l Bonding approval 

l Credit worthiness 

l Management and accounting systems 

l Technical expertise 

l Estimating capacity 

0 Project experience 

Business Development Support Services Program 

MassAlliance’s BDSSP program provides technical assistance and support to M/WBE’s 

through one-on-one management and technical consulting services. We also assist 

M/WBE with the financing, tax, and insurance issues many contractors face while 

managing the growth of their companies. These services are provided by construction 

contracting industry experts, including engineers, estimators, project managers, lawyers, 

and accountants. These expert consultants provide our clients with a wide range of 

experience in the construction industry. This expertise includes: 

0 Construction management services 

l Operational management 

l Estimating 

0 Construction financing 

l Tax and accounting 

l Construction law 

l Credit capital services 

I45 South Street, Sixth Floor, Boston, Massachusetts 02 I I I + Phone (6 I7)556-2350 + Fax (6 17) 574-9003 l E-mail: MAalliance@aol.com 
-2- 

To date, more than 350 companies have benefited from one or more of MassAlliance’s 

wide range of technical assistance and capacity-building services. 

Education & Training Program 

MassAlliance’s E&T program presents skill development courses in construction 

management, as well as business seminars and technical assistance workshops to assist 

M/WBEs to conduct business more effectively. 

We have provided education and training services to 1,753 participants from 490 

companies. The E&T program allows contractors to acquire the skills and techniques 

necessary to compete in the construction marketplace. MassAlliance’s instructors 

represent a wide cross-section of the New England construction industry and are all 

experts in construction and construction-related fields. Their practical, hands-on 

experience provides a real-world approach to the E&T programs and course offerings. 

The BDSSP and E&T programs work hand in hand to develop technical assistance 

programs and education and training course offerings that best meet the needs of our 

clients. 
MassAlliance 

_._.. __---__ --

FIFTH ANNlVERSAR+ 

I Al- THE CENTER OF SMALL BUSINESS DEVELOPMENI 

Massachusetts Alliance for Small Contractors, Inc 

Bruce C. Boiling + Executive Director 

PUBLIC MEETING REGARDING THE PROPOSED MERGER OF FLEET 

FINANCIAL GROUP, INC. AND BANKBOSTON CORPORATION 

BRUCE C. BOLLING, EXECUTIVE DIRECTOR 

MASSACHUSETTS ALLIANCE FOR SMALL CONTRACTORS, INC. 

Testimony before the Federal Reserve Bank of Boston 

SUMMARY OF FINDINGS 

- It is estimated that the commonwealth of Massachusetts, through its various 

subdivisions and agencies, will spend $3B a year on construction projects during the 

next 5 years,’ excluding municipal and private construction/development. 

- Most projects will be awarded to prime and general contractors who in turn will 

assume a management role and will subcontract most of the work to small contractors 

creating tremendous business opportunities. They will require the small contractor to 

bond and finance labor, material, and capital expenditures. 

- Undercapitalized small contractors will struggle and in many instances, be unable to 

finance new projects because of their traditional cash flow problems. Adding to the 

dilemma has been the inflexibility of traditional financing models to stimulate 

company growth. 

- The construction industry is a mature industry with low margins requiring large 

capital investments and high concentration of sales in one project. Financial 

characteristics of small contractors are: 

- Small contractors are undercapitalized from inception due to lack of personal 

wealth and interest from investors 

- Contractors experience slow collection of accounts receivable 

- 5% of their revenue is retained until completion of the project 

- Due to the low margins of some projects, just slightly higher than the retainage 

amount of their revenue, a great portion of the profit is carried in the balance sheet 

as accounts receivable 

- Working capital needs are financed by stretching out vendors as long as possible, 

jeopardizing business relationships 

- Historically, there has been a lack of funding sources to finance capital 

expenditures and working capital 

I45 South Street, Sixth Floor, Boston, Massachusetts 02 I I I l Phone (6 I7)556-2350 + Fax (6 17) 574-9003 l E-mail: MAalliance@aol.com 
-2- 

- Lack of collateral base either in the business or personally 

- It is very difficult and it takes years for a small contractor to internally finance 

growth under the above circumstances, if at all. 

In summary, small contractors had to start their businesses undercapitalized, resulting in 

long-standing liquidity problems that substantially remain today. We welcome the 

opportunity to work with you and meet this challenge together to create a new lending 

model which will result in a family of financial products designed to promote investment 

in equity and working capital financing for small contractors. 

The following report was prepared for the internal use of MassAlliance. Given the 

subject matter of our meeting today, I would like to share with you our findings. 

Obiective 

The objective of this analysis is to evaluate and profile the financial position of the 

companies actively receiving services from the Mass Alliance to determine trends, 

common characteristics, and strong and weak points. The findings will allow 

MassAlliance to maximize the delivery of the various programs offered and will assist in 

the design of new programs. 

FindinPs 

The main financial obstacle that small contractors are experiencing is undercapitalization 

resulting in high leverage ratios and lack of liquidity. 

Liquidity reflects the ability of a company to cover its current obligations. Liquidity is 

measured by several ratios, i.e., current ratio, a high ratio depicts high liquidity. Assets 

that are readily available to convert to cash (highly marketable investments, accounts 

receivable, etc.) are more desirable since it allows the company to pay its obligation as 

they come due. The following chart compares the liquidity ratios of our clients to the 

industry standards (industry standards reflect the results of an annual survey conducted 

by the Construction Financial Management Association by SIC #): 
. . 

-3- 

Liquidity Ratios 

68.8% 

62.5% 

E 

‘E 

g 

E 

S 

z 

# 

Current Ratio Quick Ratio Days of Cash Working 

Capital 

Turnover 

. In all the ratios in the previous chart; more than 50% of the participants in our study rated 

worse than the industry. To understand some of the reasons causing this situation we 

should start with the high percentage of companies having very low Days of Cash as 

shown in the above chart. This means they have below normal cash reserves and depend 

on the timely collection of receivables to meet their obligations. 

The following chart provides us with a comparison of the accounts receivable balance as 

compared to sales and the accounts payable balance as compared to cost of goods sold. 

One hidden factor in the accounts receivable numbers is the retainage of 5% that is 

required in public projects. Payment of the retainage is not available until the end of the 

project. For some small contractors that perform their work at the front end of the project, 

the waiting period can be over a year or two. Further analysis of the retainage balance for 

specific companies reveals that in some cases it represents as much as 20% of the 

outstanding accounts receivable balance. 

Efficiency Ratios 

68.8% 

56.3% 

z .- 

s 

E” 

s 

z 

# 

Days in Days in Accts. Operating Cycle 

Receimbles Payable 
-. 

-4- 

More than 60% of our clients are slower than their peers and competitors, in collecting 

their receivables and paying their vendors. The disparity with industry is more dramatic 

when compared to the individual companies. The ratios in Table I below are from a 

company that has been in business for more than 10 years and with sales close to 

$5.7MM. 

Table I 

Days in Receivables 

Days in Accts. Payable 

Operating Cycle 

Client # 1 

114.2 

107.7 

24.2 

Industry 

Average 

65.2 

30.9 

55.1 

Difference 

75.2% 

248.5% 

-56.1% 

The above company is not atypical or unique to the client pool of Mass Alliance. In this 

case, one can see that vendors are financing most of the short-term needs of the company. 

The gap between collecting receivables and paying their vendors is only 7 days (114.2 

days to 107.7days). In other words, vendors’ balances are being extended as much as 

possible to finance the slow collections of payables. This gap is so short that the company 

is in danger of missing a vendor payment. The long Days in Accounts Payables is a result 

of the higher than normal accounts payable balances which affects negatively the debt 

equity ratio. 

Compounding this situation is the undercapitalization typical in small businesses. The 

following chart shows how our clients as a group fare against the industry: 

Leverage Ratios 

81.3% 

Debt to Revenue to Assest Fixed Asset Equityto 

Equity Equity Turnover Ratio G&A 

Expenses 

Above industry 

Average 

. Under Industry 

Average 

Leverage ratios are a measurement that traditional funding entities use to determine the 

relationship between resources and owners. This ratio is used to assess the financial risk 

of a company and to structure loans accordingly. Our group of companies rated lower 

than industry standard in almost every leverage ratio. 
-5- 

Evidence of the undercapitalization of our clients is the combination of lower Debt to 

Equity Ratio, Revenue to Equity Ratio and Equity to G&A expense Ratio than industry 

standards. To determine how low they are let us examine the example in the next table. 

Again the company selected is the same as in Table I is a well-established business with 

sales of $5.7MM. 

Table II 

Debt to Equity 

Revenue to Equity 

Asset Turnover 

Fixed Asset Ratio 

Equity to G&A Expenses 

Industry 

Client # 1 Average Difference 

2.5 1.6 56.5% 

7.3 7.3 0% 

2.1 2.5 -16.2% 

6.5% 18.2% -64.3% 

1.4 1.4 0% 

This company carries 56.5% more debt than its peers in relation to its capital base. Thus, 

carrying more financial risk than a typical company in the same line of business. Also, its 

assets are producing 16.2% less sales per dollar than the industry. In this case the Equity 

to G&A Expense, an indication of the coverage of overhead by equity, is in line with 

industry standards, must probably due to a lack of infrastructure found in companies of 

the same size. In our analysis, 81% of the companies’ Equity to G& A ratio are under 

industry standard (see leverage ratio chart above). In many cases we found this ratio to be 

less than 1, that is, the G&A expense is higher than the entire equity of the company. This 

low coverage of G&A expenses is alarming when one considers the fact that in many 

cases these companies are not well staffed and the infrastructure is substandard. Please 

refer to analysis by company attached to the report for further detail. 

One last important point regarding the undercapitalization of small businesses. There are 

two ways to increase capital in a company: internally and externally. The internal way to 

raise the*capital investment in a company is through the accumulation of earnings. The 

composite Net Profit Margin for the industry is less than 2%. For the various SIC codes 

examined in our analysis we noted a similar Net Profit Margin. With the high retainage 

balances (5% of the billings) and thin margins (2% or less) small contractors can not 

convert their earnings into cash quickly, instead the profits remain on the balance sheet in 

the form of accounts receivable. Retainage is not paid until the project is completed, that 

may take more than one year. Hence, financing growth with internal funds is very 

difficult. 

External forms of financing, outside investors, partners and others are not plentiful to our 

clients. Due to the financial factors discussed above, the type of industry (matured) low 

growth, with a high concentration of sales in one project, thin returns, etc., capital money 

is almost out of reach to our client base. 
-6- 

Methodoloq 

l We requested the 1997 financial statements and the SIC # of all companies receiving 

services from Mass Alliance. 

l Financial ratios for each respondent were computed 

l We matched each respondent to the SIC # by size of the Construction Financial 

Management Association industry survey 

l We compared the ratios we computed to those reported by CFMA 

l We determined if the significant ratios were over or under the industry average.