BILL ANALYSIS                                                                                                                                                                                                    Ó




                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair


          AB 2671 (V Perez) - Small business financial development 
          corporations.
          
          Amended: April 26, 2012         Policy Vote: B,P&ED 8-0
          Urgency: No                     Mandate: No
          Hearing Date: August 16, 2012                     Consultant: 
          Bob Franzoia  
          
          SUSPENSE FILE.  AS PROPOSED TO BE AMENDED.


          Bill Summary: AB 2671 would extend indefinitely provisions 
          increasing the amount of guarantee liability outstanding with 
          respect to the Small Business Expansion Fund (SBEF) to five 
          times the amount of funds on deposit in the fund or in a 
          corporation's trust fund account.

          Fiscal Impact: Estimated $445,200 annually in increased 
          guarantee liability from the Small Business Expansion Fund.

          Background: Existing law, set to sunset on January 1, 2013, the 
          maximum leverage ratio for deposits on reserve to payout on loan 
          guarantees made from the SBEF is one dollar in reserve for every 
          five dollars (20 percent) guaranteed.  Expiration of the sunset 
          would return the ratio to one dollar in reserve for every four 
          dollars (25 percent) guaranteed.  By increasing that ratio there 
          would be a 20 percent increase in funds available to guarantee 
          loans while also increasing risk.

          The SBEF was created for the purpose of receiving state moneys 
          to provide guarantees for loans issued to small businesses by 
          private financial institutions, typically banks that would 
          otherwise not approve a term loan or line of credit.  As a 
          result the guarantee, small businesses (particularly women and 
          minority owned businesses) are able to grow and expand because 
          they are able to secure financing.  The loan guarantee serves as 
          an incentive for financial institutions to issue loans to 
          eligible small businesses, where the guarantee covers a 
          percentage of the loan balance and interest on defaults.  As the 
          overall administrator of the SBEF, the Business, Transportation 
          and Housing Agency enters into annual contracts with 11 
          Financial Development Corporations (FDCs).  The FDCs market the 








          AB 2671 (V Perez)
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          loan guarantee program, coordinate the packaging of the loan and 
          loan guarantee applications, issue the loan guarantees, and 
          manage the portfolio of outstanding loan guarantees.  The 
          state's obligations and liabilities are backed by the SBEF and 
          are limited to the amount of money in the loan guarantee trust 
          fund.

          While increasing the ratio between moneys in reserve and the 
          moneys available to guarantee more loans will increase the 
          ability of the FDCs to make loans, it will also increase risk by 
          increasing the potential for loan defaults.  Increases in 
          default would result in cost pressure to appropriate funds to 
          the SBEF or it would result in fewer funds being available for 
          loan.

          Related Legislation: AB 610 (Price) Chapter 601/2007 increased 
          the amount of the guarantee liability outstanding with respect 
          to the SBEF from four times to five times the
          amount of funds on deposit in the fund or in a corporation's 
          trust fund account until January 1, 2013.  In order to provide 
          an assessment of the impact of increasing this ratio, that bill 
          required, as part of existing reporting requirements 
          (Corporations Code 14030.2), to report on loan activities and 
          default rates over that period.

          Staff Comments: The federal State Small Business Credit 
          Initiative Act of 2010 allocated $168.6 million to the state, 
          split between the SBEF and the California Pollution Control 
          Financing Agency in the State Treasurer's Office.  Funds not 
          allocated by 2017 revert to the federal government.

          For the SBEF, any small business is eligible for a loan used 
          primarily in the state and for any standard business purpose 
          beneficial to the applicant's business, such as expansion into 
          new facilities or purchase of new equipment.  Guarantees can 
          cover up to 90 percent of the loan amount, with the guaranteed 
          portion of the loan not exceeding $500,000.  The term of the 
          loan guarantee may extend up to seven years.  Interest rates are 
          negotiated between the borrower and the lender.  Collateral is 
          generally required with each transaction tailored to meet the 
          borrower's financial situation.

          Since 2007-08, the default or loan loss rate for this program is 
          0.54 percent (2007-08), 1.10 percent (2008-09) 1.86 percent 








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          (2009-10) and 2.86 percent (2010-11) for an average of 1.59 
          percent.  This analysis averages those years average to estimate 
          an annual loss rate.  As defaults increase, the cost to repay 
          the fund increases.  The table below estimates that cost at 
          $445,200 annually.

                                   Actual              Potential________
           Reserve                  $28,000,000         $28,000,000

          Liability                $112,000,000        $140,000,000

          Leverage                 4:1                 5:1
          -----------------------------------------------------------------
          --------------------------------------------
          Annual default rate             0.50 percent 0.50 percent

          Net default payments     $560,000            $700,000

          Potential additional payments                $140,000
          -----------------------------------------------------------------
          --------------------------------------------
          Five year average net default rate  1.59 percent1.59 percent

          Net default payments     $1,780,000          $2,226,000

          Potential additional payments                $445,200

          The proposed amendments would extend the sunset to January 1, 
          2018.