BILL ANALYSIS Ó
-----------------------------------------------------------------------
|Hearing Date:July 2, 2012 |Bill No:AB |
| |2671 |
-----------------------------------------------------------------------
SENATE COMMITTEE ON BUSINESS, PROFESSIONS
AND ECONOMIC DEVELOPMENT
Senator Curren D. Price, Jr., Chair
Bill No: AB 2671Author:Committee on Jobs, Economic
Development, and the Economy
As Amended:April 26, 2012 Fiscal: Yes
SUBJECT: Small business financial development corporations: loans and
loan guarantees.
SUMMARY: Removes the sunset date on the maximum allowable leverage of
reserve funds necessary under Small Business Loan Guarantee Program
(SBLGP). The effect of this change is to make the five dollar for
every one dollar guarantee the permanent maximum reserve rather than
the maximum reserve of four dollars for every one dollar of loan
guaranteed which was to go into effect on January 1, 2013. The
Director of the SBLGP would still have the discretion to set a lesser
leverage amount for the overall program and for any individual small
business financial development corporation, as defined. Provides that
the 20% loan guarantee reserve requirement shall continue indefinitely
as well, and also repeals an obsolete provision regarding the prior
Trade and Commerce Agency.
Existing law:
1)Enacts the California Small Business Financial Development
Corporation Law (CSBFDC Law) which authorizes the formation of small
business financial development corporations (FDCs) to grant loans or
loan guarantees for the purpose of stimulating small business
development. (The program which this law creates is referred to as
the "Small Business Loan Guarantee Program" (SBLGP) and is
administered by the Business, Transportation and Housing Agency.)
(Corporations Code (CC) §§ 14000 - 14091)
2)Establishes a Small Business Development Board with specified duties
and responsibilities to carry out the legislative intent of the
AB 2671
Page 2
CSBFDC Law. (CC §§ 14020 - 14022)
3)Provides for a Director to be designated by the Secretary of
Business, Transportation and Housing Agency with duties and powers
as specified. (CC §§ 14025 - 14028)
4)Defines "corporation" as any nonprofit California small business
financial development corporation (FDC) created pursuant to the
CSBFDC Law. (CC § 14010)
5)Creates within the State Treasury the California Small Business
Expansion Fund (Expansion Fund) for the purpose of retaining the
moneys which separately capitalize the SBLGP and paying out
defaulted loan guarantees issued under the SBLGP. The amount of
guarantee liability outstanding at any one time shall not exceed
five times the amount of funds on deposit in the Expansion Fund plus
other funds as specified. This provision shall become inoperative
and be repealed on January 1, 2013, and the same provision which
becomes operative on that date would require that the amount of the
guarantee liability outstanding at any one time shall not exceed
four times the amount of funds on deposit in the Expansion Fund.
(CC § 14030)
6)Authorizes the Director to: (CC § 14037 )
a) Reallocate moneys between individual accounts based on which
corporations most effectively use the guarantee funds; and
b) Recommend whether the Expansion Fund and individual FDC trust
fund accounts are to be leveraged, and if so, how much the funds
may be leveraged.
7)Requires a corporate guarantee to be backed by funds on deposit in
the corporation's trust fund account, or by receivables due from the
corporation's trust fund account to another fund in state
government, as specified. Loan guarantees shall be secured by a
reserve of at least 20 percent to be determined by the Director.
This provision shall become inoperative and repealed on January 1,
2013, and the same provision which becomes operative on that date
would require that the loan guarantee shall be secured by a reserve
of at least 25 percent to be determined by the Director. (CC §
14070)
8)Specifies that it is the intent of the Legislature that the
corporations make maximal use of their statutory authority to
guarantee loans and surety bonds, including the authority to secure
AB 2671
Page 3
loans with a minimum loan loss reserve of only 20 percent , so that
the financing needs of small business may be met as fully as
possible within the limits of corporation's loan loss reserves.
This provision shall inoperative and repealed on January 1, 2013,
and the same provision which becomes operative on that date would
specify the minimum loss reserve as 25 percent . (CC § 14076)
9)Requires the former Trade and Commerce Agency to contract with an
entity to conduct an independent statewide assessment of capital
needs in California pertaining to the programs established under the
CSBFDC Law, and to establish minimum standards for the siting of
small business financial development corporations, to be completed
no later than June 30, 1998. (CC § 14069.6)
This bill:
1)Extends indefinitely the provision in Item # 6) above, limiting the
amount of guarantee liability outstanding from exceeding five times
the amount of funds on deposit in the expansion fund, as specified,
by repealing the provision that, beginning January 1, 2013, would
limit the amount of guaranteed liability outstanding from exceeding
four times the amount of those funds.
2)Extends indefinitely the provision in Item # 7) above, that loan
guarantees on a corporation's trust fund account shall be secured by
a reserve of at least 20 percent to be determined by the Director by
repealing the provision that, beginning January 1, 2014, would have
required a maximum 25 percent reserve.
3)Extends indefinitely the provision in Item # 8) above, that minimum
loss reserve be 20 percent rather than 25 percent .
4)Repeals the obsolete requirement for a study and assessment by the
now abolished Trade and Commerce Agency, as specified in Item # 9)
above.
FISCAL EFFECT: According to the Assembly Committee on Appropriations
analysis dated May 16, 2012, negligible fiscal impact.
COMMENTS:
1.Purpose. The Assembly Committee on Jobs, Economic Development and
the Economy (JEDE) is the official sponsor of this measure. These
changes, however, were recommended from the Association of Financial
AB 2671
Page 4
Development Corporations . According to the Chair of JEDE, "AB 2671
will serve as the vehicle for the Assembly Jobs, Economic
Development, and the Economy Committee omnibus bill on access to
capital and economic development issues. The current provisions
remove a sunset in order to retain existing law. As California
slowly moves out of the recession, maintaining financing options for
small businesses is essential."
The Chair of JEDE points out that in 2007, AB 610 (Price, Chapter 601,
Statutes of 2007) increased the maximum leverage amount allowed by
statute from 4-to-1 to 5-to-1 under reserve requirement for the
SBLGP. The Director of the SBLGP already has the discretion to set
a lesser leverage amount for the overall program and for any
individual FDC.
2.Background.
a) California Small Business. California's dominance in many
economic areas is based, in part, on the significant role small
businesses play in the state's $1.9 trillion economy. Businesses
with less than 100 employees comprise nearly 98% of all
businesses, and are responsible for employing more than 37% of
all workers in the state.
Among other advantages, small businesses are crucial to the
state's international competitiveness and are an important means
for dispersing the positive economic impacts of trade within the
California economy. California's small businesses comprised 96%
of the state's 60,000 exporters in 2009, which accounted for over
44% of total exports in the state. Nationally, small businesses
represented only 31.9% of total exports. These numbers include
the export of only goods and not services.
Historically, small businesses have functioned as economic
engines, especially in challenging economic times. During the
nation's economic downturn from 1999 to 2003, microenterprises
(businesses with fewer than five employees) created 318,183 new
jobs or 77% of all employment growth, while larger businesses
with more than 50 employees lost over 444,000 jobs. From 2000 to
2001, microenterprises created 62,731 jobs in the state,
accounting for nearly 64% of all new employment growth. More
recently, the federal Small Business Administration's Small
Business Economy 2011, states that small businesses nationally
outperformed large firms in net job creation nearly three out of
four times from 1992 through 2010 when private-sector employment
rose.
AB 2671
Page 5
During this current economic downturn, however, small business
owners have been especially hard hit. Equifax has reported that
bankruptcies in California rose by 81% in 2009, as compared to
44% nationally. This trend continued in 2010 where the Equifax
report stated that while in general bankruptcies were down across
the nation including some regions in the west, small business
bankruptcies in California accounted for almost 20% of all small
business bankruptcies in the nation.
b) Small Business Loan Guarantee Program (SBLGP). The SBLGP
enables a small business to obtain a term loan or line of credit
when it cannot otherwise qualify for a loan on its own. The
state, working through 11 FDCs, offers direct loans or loan
guarantees that a qualifying small business borrower could not
otherwise obtain.
Applicants must meet the definition of a small business (100 or
fewer employees) with the specific market rate loan terms and
interest rates being negotiated between the borrower and the
lender. Proceeds of the loan must be used primarily in
California for any standard business purpose applicable to the
applicant's business. The guarantee program provides guarantees
covering up to 90% of the loan, but not exceeding $500,000. The
guarantee program allows a business to not only obtain a loan but
to also establish credit with a lender. The business is then
more likely to obtain additional financing on its own.
In 2010-11, approximately $5 million was made available for loan
guarantees under the SBLGP, which leveraged $13 million in small
business loans. During this period, 99 guarantees were provided,
creating and/or retaining 595 jobs. As noted in these numbers,
2010-11 was a slow year in providing guarantees; in the current
year (2011-12), however, the program has demonstrated higher
volume with 38 guarantees within the first quarter.
As of the close of the first quester of 2011-12, the outstanding
loan portfolio was $37 million in total reserves covering $ 215
million in total loans, representing 1,548 in outstanding
guarantees.
c) Reorganization of SBLGP. The Governor's 2012-13 proposed
budget included a discussion on how the state would be better
served if certain state programs, departments and agencies were
reorganized. On March 30, 2012, the Governor submitted the
reorganization plan that was outlined in his proposed budget to
the Little Hoover Commission, which included a number of
AB 2671
Page 6
proposals of importance to the economic development community.
According to the Governor's Office, the reorganization plan is
far-reaching and represents his continued commitment to
streamline state government. Among other items, the
reorganization plan proposes:
Dismantling BTH and the State and Consumer Services Agency
(SCS) and moving programs to other existing and new agencies.
Overall, the number of state agencies is reduced from 12 to 10;
and
Moving the following programs to the Governor's Office of
Business and Economic Development:
o Small Business Loan Guarantee Program (SBLGP);
o The California Travel and Tourism Commission;
o The California Film Commission;
o The Film California First Program; and
o The Infrastructure and Economic Development Bank
(I-Bank).
The Little Hoover Commission had 30 days to analyze the Plan and
submit its recommendations to the Governor and Legislature. The
Legislature has until July 3, 2012 (60 days) to consider the
Plan. The Plan will go into effect on July 3rd unless the
Legislature takes an action pursuant to a resolution to
disapprove the Plan with a majority of the Members in each house
voting.
On April 23 to April 25, 2012, the Commission held a series of
public hearings and received written testimony, interviewed
experts and reviewed analyses of the departments involved,
including its own previous work when relevant. On April 25, May
11 and May 22, 2012, the Commission also held three public
hearings to develop and discuss its report and recommendation to
the Legislature. In regards to relocating the SBLGP to GO-Biz,
and other changes as mentioned, the Commission stated, "These
moves are consistent with the Commission's previous
recommendations, and the Commission endorses them as they should
bolster the state's economic development efforts." As further
stated by the Commission: "The functions of the entities that
would become part of GO-Biz are a natural fit for economic and
business development. They are not physically relocating but are
virtually becoming a part of GO-Biz, similar to what the
Commission envisioned."
AB 2671
Page 7
3.Related Legislation.
a) AB 610 (Price, Chapter 601, Statutes of 2007) enhances the
Small Business Loan Guarantee Program's ability to leverage
existing program dollars increasing its ability to serve more
small businesses' financial needs per year.
b) AB 1104 (Aghazarian, Chapter 624, Statues of 2007) makes
modifications to the Small Business Loan Guarantee Program
relating to small business disaster guarantees and eligible
investments of SBLGP funds.
c) AB 1431 (Arambula) of 2008, would have established the Early
Stage Investment Guarantee Program, administered through the
Small Business Loan Guarantee Program, for the purpose of
assisting small businesses in attracting investors during the
early years of their company's growth, as specified. The bill
was held in Assembly Appropriations Committee.
4.Arguments in Support. The Association of Financial Development
Corporations (AFDC) offers their support for this measure which
would allow 5 to 1 leverage ratio for loan guarantees within the
SBLGP. The AFDC explains that in 2007, then Assemblymember Curren
Price authored AB 610 which raised the leverage ratio from 4 to 1 to
5 to 1. That leveraging ration is due to expire January 1, 2013.
This bill would repeal the sunset date and allow for the 5 to 1
ratio going forward.
According to AFDC, the SBLGP has proven it's successfulness in spite
of drastic budget cuts and in this regard have seen no resulting
problematic issues relative to the current 5 to 1 ratio leverage
requirements. Additionally, AFDC states, with infusion of federal
guarantee dollars the 5 to 1 ratio has proved to be a favorable
enhancement to the FDC's in its efforts to disseminate federal funds
immediately into the hands of small businesses and communities of
greater Ýsic] which in itself, a challenging task during such
economic uncertainty.
SUPPORT AND OPPOSITION:
Support:
Association of Financial Development Corporations
California Association for Local Economic Development
California Association for Micro Enterprise Opportunity
AB 2671
Page 8
Opposition:
None on file as of June 27, 2012
Consultant:Bill Gage