BILL NUMBER: AB 716 CHAPTERED 08/04/03 CHAPTER 178 FILED WITH SECRETARY OF STATE AUGUST 4, 2003 APPROVED BY GOVERNOR AUGUST 3, 2003 PASSED THE SENATE JULY 21, 2003 PASSED THE ASSEMBLY MAY 15, 2003 INTRODUCED BY Assembly Member Chan FEBRUARY 19, 2003 An act to amend Sections 14010, 14030, 14034, 14036, 14037, 14038, 14039, 14040, 14041, and 14043 of, to amend and renumber Section 14030.2 of, and to repeal Sections 14031 and 14035 of, the Corporations Code, relating to small business financial development corporations. LEGISLATIVE COUNSEL'S DIGEST AB 716, Chan. Small business financial development corporations. Existing law establishes small business financial development corporations, a California Small Business Financial Development Corporation Loan Guarantee Fund, and a California Small Business Expansion Fund that includes a California Small Business Financial Development Loan Guarantee Account which is a continuously appropriated account. Existing law requires the expansion fund to be for the sole purpose of receiving state money to make loans, guarantees, and restricted investments. Existing law authorizes the Executive Director of the California Office of Small Business to establish accounts within the expansion fund and to request the Treasurer to invest funds in the expansion fund. This bill would abolish the California Small Business Financial Development Corporation Loan Guarantee Fund and the California Small Business Financial Development Loan Guarantee Account. The bill would create a trust fund and trust fund accounts. The bill would repeal the provisions limiting the expansion fund to be for the sole purpose of receiving state money and would instead allow the expansion fund and the trust fund to be for the purpose of receiving state, federal, or local government money, and any other public or private money to make loans, guarantees, and restricted investments to small business financial development corporations. The bill would authorize the Executive Director of the California Office of Small Business to request a trustee of a trust fund to invest funds in specified securities. The bill would make related changes. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 14010 of the Corporations Code is amended to read: 14010. Unless the context otherwise requires, the definitions in this section govern the construction of this part. (a) "Corporation" or "the corporation" means any nonprofit California small business financial development corporation created pursuant to this part. (b) "Financial institution" means banking organizations including national banks and trust companies authorized to conduct business in California and state-chartered commercial banks, trust companies, and savings and loan associations. (c) "Financial company" means banking organizations including national banks and trust companies, savings and loan associations, state insurance companies, mutual insurance companies, and other banking, lending, retirement, and insurance organizations. (d) "Expansion Fund" means the California Small Business Expansion Fund. (e) Unless otherwise defined by the office by regulation, "small business loan" means a loan to a business defined as an eligible small business as set forth in Section 121.3-10 of Part 121 of Chapter 1 of Title 13 of the Code of Federal Regulations, including those businesses organized for agricultural purposes that create or retain employment as a result of the loan. From time to time, the director shall provide guidelines as to the preferred ratio of jobs created or retained to total funds borrowed for guidance to the corporations. (f) "Employment incentive loan" means a loan to a qualified business, as defined in subdivision (h) of Section 7082 of the Government Code, or to a business located within an enterprise zone, as defined in subdivision (b) of Section 7072 of the Government Code. (g) "Loan committee" means a committee appointed by the board of directors of a corporation to determine the course of action on a loan application pursuant to Section 14060. (h) "Board of directors" means the board of directors of the corporation. (i) "Office" means the California Office of Small Business Development. (j) "Board" means the California Small Business Board. (k) "Agency" means the Trade and Commerce Agency. (l) "Director" means the Executive Director of the California Office of Small Business. (m) "Secretary" means the Secretary of Trade and Commerce. (n) "Trust fund" means the money from the expansion fund that is held in trust by a financial institution or a financial company. A trust fund is not a deposit of state funds and is not subject to the requirements of Section 16506 of the Government Code. (o) "Trust fund account" means an account within the trust fund that is allocated to a particular small business financial development corporation for the purpose of paying loan defaults and claims on bond guarantees for a specific small business financial development corporation. (p) "Trustee" is the lending institution or financial company selected by the office to hold and invest the trust fund. The agreement between the agency and the trustee shall not be construed to be a deposit of state funds. SEC. 2. Section 14030 of the Corporations Code is amended to read: 14030. There is hereby created in the State Treasury the California Small Business Expansion Fund. All or a portion of the funds in the expansion fund may be paid out, with the approval of the Department of Finance, to a lending institution or financial company that will act as trustee of the funds. The expansion fund and the trust fund shall be used to pay for defaulted loan guarantees issued pursuant to Article 9 (commencing with Section 14070), administrative costs of corporations, and those costs necessary to protect a real property interest in a defaulted loan or guarantee. The amount of guarantee liability outstanding at any one time shall not exceed four times the amount of funds on deposit in the expansion fund, including each of the trust fund accounts within the trust fund, unless the office has permitted a higher leverage ratio for an individual corporation pursuant to subdivision (c) of Section 14037. SEC. 3. Section 14030.2 of the Corporations Code is amended and renumbered to read: 14031. (a) The director may establish accounts within the expansion fund or trust fund for loan guarantees and surety bond guarantees, including loan loss reserves. Each account is a legally separate account, and shall not be used to satisfy loan or surety bond guarantees or other obligations of another corporation. The director shall recommend whether the expansion fund and corporate fund accounts are to be leveraged, and if so, by how much. Upon the request of the corporation, the director's decision may be repealed or modified by a board resolution. (b) Annually, not later than January 1 of each year commencing January 1, 1996, the director shall prepare a report regarding the loss experience for the expansion fund and the trust fund for loan guarantees and surety bond guarantees for the preceding fiscal year. At a minimum, the report shall also include data regarding numbers of surety bond and loan guarantees awarded through the expansion fund, including ethnicity and gender data of participating contractors and other entities, and experience of surety insurer participants in the bond guarantee program. The director shall submit that report to the Secretary of Technology, Trade, and Commerce for transmission to the Governor and the Legislature. SEC. 4. Section 14031 of the Corporations Code is repealed. SEC. 5. Section 14034 of the Corporations Code is amended to read: 14034. The director at his or her discretion, with the approval of the Director of Finance, may request the trustee to invest those funds in the trust fund in securities issued by the Treasury of the United States government. Returns from these investments shall be deposited in the expansion fund and shall be used to support the programs of this part. SEC. 6. Section 14035 of the Corporations Code is repealed. SEC. 7. Section 14036 of the Corporations Code is amended to read: 14036. The expansion fund and trust fund are created solely for the purpose of receiving state, federal, or local government money, and other public or private money to make loans, guarantees, and restricted investments pursuant to this article. Funds in the expansion fund may be allocated by the office, with the approval of the Department of Finance, to the trust fund accounts. SEC. 8. Section 14037 of the Corporations Code is amended to read: 14037. (a) The state shall not be liable or obligated in any way beyond the state money that is allocated and deposited in the trust fund account from state money and that is appropriated for these purposes. (b) The office may reallocate funds held within a corporation's trust fund account. (1) The office shall reallocate funds based on which corporation is most effectively using its guarantee funds. If funds are withdrawn from a less effective corporation as part of a reallocation, the office shall make that withdrawal only after giving consideration to that corporation's fiscal solvency, its ability to honor loan guarantee defaults, and its ability to maintain a viable presence within the region it serves. Reallocation of funds shall occur no more frequently than once per fiscal year. Any decision made by the office pursuant to this subdivision may be appealed to the board. The board has authority to repeal or modify any decision to reallocate funds. (2) The office may authorize a corporation to exceed the leverage ratio specified in Section 14030, subdivision (b) of Section 14070, and subdivision (a) of Section 14076 pending the annual reallocation of funds pursuant to this section. However, no corporation shall be permitted to exceed an outstanding guarantee liability of more than five times its portion of funds on deposit in the expansion fund. SEC. 9. Section 14038 of the Corporations Code is amended to read: 14038. (a) The funds in the expansion fund shall be paid out to trust fund accounts by the Treasurer on warrants drawn by the Controller and requisitioned by the office, pursuant to the purposes of this chapter. The office may transfer funds allocated from the expansion fund to accounts, established solely to receive the funds, in lending institutions designated by the office to act as trustee. The lending institutions so designated shall be approved by the state for the receipt of state deposits. Interest earned on the trust fund accounts in lending institutions may be utilized by the corporations pursuant to the purposes of this chapter. (b) Except as specified in subdivision (c), the office shall allocate and transfer money to trust fund accounts based on performance-based criteria. The criteria shall include, but not be limited to, the following: (1) The default record of the corporation. (2) The number and amount of loans guaranteed by a corporation. (3) The number and amount of loans made by a corporation if state funds were used to make those loans. (4) The number and amount of surety bonds guaranteed by a corporation. Any decision made by the office pursuant to this subdivision may be appealed to the board within 15 days of notice of the proposed action. The board may repeal or modify any reallocation and transfer decisions made by the office. (c) The criteria specified in subdivision (b) shall not apply to a corporation that has been in existence for five years or less. The office shall develop regulations specifying the basis for transferring account funds to those corporations that have been in existence for five years or less. SEC. 10. Section 14039 of the Corporations Code is amended to read: 14039. Pursuant to this section and the regulations, the state has residual interest in the funds deposited by the state to a trust fund account and to the return on these funds from investments. On dissolution or suspension of the corporation, these funds shall be withdrawn by the director from the trust fund account and returned to the expansion fund or temporarily transferred to another trust fund account. This provision shall be contained in the trust instructions to the trustee. SEC. 11. Section 14040 of the Corporations Code is amended to read: 14040. Each trust fund account shall consist of a loan guarantee account, and, upon recommendation by the director, a bond guarantee account, each of which is a legally separate account, and the assets of one account shall not be used to satisfy loan guarantees or other obligations of another corporation. Not more than one-third of a trust fund account shall be allocated to a bond guarantee account. No corporation shall use trust fund accounts to secure a corporate indebtedness. State funds deposited in the trust fund accounts, with the exception of guarantees established pursuant to this chapter, shall not be subject to liens or encumbrances of the corporation or its creditors. SEC. 12. Section 14041 of the Corporations Code is amended to read: 14041. (a) Except as provided in subdivisions (c) and (d) of Section 14070, the trust fund account, shall be used solely to make loans, guarantee bonds, and guarantee loans, approved by the corporation, that meet the California Small Business Development Corporation Law loan criteria. The state shall not be liable or obligated in any way as a result of the allocation of state money to a trust fund account beyond the state money that is allocated and deposited in the fund pursuant to this chapter, and that is not otherwise withdrawn by the state pursuant to this chapter. (b) A summary of all loans and bonds to which a state guarantee is attached shall be submitted to the director upon execution of the loan agreement and periodically thereafter. (c) A summary of all loans made by a corporation shall be submitted to the director upon execution of the loan agreement and periodically thereafter. SEC. 13. Section 14043 of the Corporations Code is amended to read: 14043. The financial institution that is to act as trustee of the trust fund shall be designated after review by the director. The corporation shall not receive money on deposit to support guarantees issued under the provisions of this chapter without the approval of the director.