BILL ANALYSIS Ó Bill No: SB 1465 SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION Senator Roderick D. Wright, Chair 2011-2012 Regular Session Staff Analysis SB 1465 Author: Yee As Amended: April 9, 2012 Hearing Date: April 10, 2012 Consultant: Paul Donahue SUBJECT Agriculture and Renewable Energy Export Loan Guarantee Financing Program DESCRIPTION This bill would establish the California Agriculture and Renewable Energy Export Loan Guarantee Financing Program within the California Pollution Control Financing Authority (CPCFA).<1> CPCFA is directed to do the following to implement the program: 1)Adopt regulations to establish the criteria determining which exporters and export transactions<2> will be eligible for loan guarantees under the program, which shall ensure: a) Borrowers have a minimum equity interest in the business. b) That loan guarantees are extended exclusively to support the export of goods, services, and agricultural commodities or renewable energy products ----------------------- <1> The CPCFA, within the Office of the State Treasurer, provides financial assistance in a variety of forms, including tax exempt bonds for qualifying waste and recycling facilities, grants and loans to clean up contaminated lands, small business loan assistance and tax exempt bonds for certain industrial facilities. <2> The program is required to conform to international trade agreements of the U.S. SB 1465 (Yee) continued PageB produced or grown primarily in the state by companies or agricultural enterprises commercially domiciled in California. c) That financing assistance using state funds shall be extended only if assistance is part of a state match required for participation in public or private financing, or it adequate financing assistance is not readily available in a timely manner. 2)CPCFA shall adopt collateral or security requirements to ensure reasonable expectation of the full repayment of loan guarantees, and shall consider and approve or reject any and all loan guarantees under the program, except that the CPCFA executive director may approve loan guarantees under $100,000, subject to ratification by CPCFA. 3)The CPCFA shall: (a) consult with the Governor's office to ensure the loan guarantee programs aren't duplicative of each other; (b) secure a delegated line of authority from the United States Export-Import bank;(c) develop a streamlined application and review process, (d) publish an annual report on the program; and (d) create advisory groups. 4)The CPCFA may charge fees, in amounts it determines, for loan guarantees provided by the program. Fees go into the Export Development Fund, which is described below. 5)Loan guarantees made by CPCFA must be secured by no less than 25% reserve in the Export Development Fund. CPCFA may require a higher reserve. 6)A loan guarantee shall not exceed any of the following: a) 90% of the required financing. (However, the CPCFA may guarantee a higher percentage of the required financing if there is evidence of lender credit exposure and adequate analysis of foreign commercial and political risk.) b) One million dollars ($1,000,000). c) The lesser of two years, or the useful life of the product. SB 1465 (Yee) continued PageC 7)The bill expressly provides that the loan guarantee program shall be implemented only to the extent that funding is available. CPCFA Executive Director : This bill instructs the executive director of CPCFA to administer the loan guarantee program, and provide export finance training for those involved in export finance assistance, including training sessions required by other public or private entities. The executive director has the following specific responsibilities: 1)To certify that exporters who borrow more than $200,000 create at least one job for each increment, and retain those jobs through the repayment period for the loan, and that exporters borrowing less than $200,000 retain all jobs through repayment of the loan. 2)To guarantee loans on qualified export transactions, pursuant to CPCFA regulations. 3)To seek public and private funding sources for the purpose of guaranteeing loans. 4)To establish a network of contacts among those public and private organizations that provides technical assistance and financial support of exporting. 5)To coordinate the efforts of the program with programs and goals of the U.S. Export-Import Bank, the U.S. Dept. of Commerce, the Small Business Administration, and other private and public programs designed to provide export assistance and financing. 6)To provide administrative assistance to the Export Financing Advisory Board. Export Financing Advisory Board : The purpose of the board is to advise the CPCFA on trends and opportunities in export financing. The board has 11 members: 1 member appointed by the Secretary of Food and Agriculture who is knowledgeable about, and experienced in, the exporting and export finance needs of CA agriculture. SB 1465 (Yee) continued PageD 4 members representing export firms, two each appointed by the Governor and the Speaker of the Assembly, who are experienced in exporting, knowledgeable about the needs and problems of small and entrepreneurial exporters, and actively employed with an exporting firm, export trading company, or export management company. 4 members representing financial institutions, 2 each appointed by the Governor and the Senate Committee on Rules, who shall be experienced in export financing, knowledgeable about the export financing needs and problems of small and entrepreneurial exporters, and actively employed with financial institutions. 2 members, one each appointed by the Treasurer and the Controller, who shall be accomplished credit evaluation representatives experienced in analyzing financial statements, such as loan applications, and in evaluating the creditworthiness of the types of loans, loan guarantees, and firms that are likely to come before the board.<3> The Export Development Fund : The Fund is created in the State Treasury for the purpose of receiving (a) state, federal, and nonpublic moneys; (b) fees earned by the program; (c) recoveries and collections on claims paid; and (d) money received from the return of investments of money in the Fund. 1)Moneys in the Fund are continuously appropriated, without regard to fiscal year. 2)Moneys in the Fund shall be paid out by the Treasurer on warrants drawn by the Controller upon order of the CPCFA for the purposes of this bill, including payment of claims under loan guarantee and payments required by state, federal, or private export programs conducted by ------------------------- <3> The appointing authorities are directed to make initial board appointments on or before April 1, 2013. Upon appointment of at least 7 members, the board may commence formal action, but in no case shall this be later than June 1, 2013. Board members shall serve at the pleasure of the appointing authority and board members serve without compensation. SB 1465 (Yee) continued PageE the CPCFA. EXISTING LAW The California Small Business Loan Guarantee Program is administered by the Business, Transportation and Housing Agency (BTH), and helps lenders make loans to borrowers who cannot qualify for conventional financing. Existing law establishes the Expansion Fund for the purpose of paying out defaulted loan guarantees issued under the Small Business Loan Guarantee Program (SBLGP). Under this program, small business financial development corporations act as financial intermediaries by using their SBLGP funding allocation to secure loan and surety bond guarantees and, under limited circumstances, direct loans. Existing law directs BTH to undertake international trade and investment activities and, as a condition of that authority, directs the development and implementation of a comprehensive international trade and investment strategy (ITI Strategy.) All international trade and foreign investment activities and funding are required to be consistent with the ITI strategy. BACKGROUND 1)Purpose : The author notes that, from 1985 to 2003, the California Export Finance Office (CEFO) made money for the state while it assisted California companies with loan guarantees, and that the CEFO had a remarkable record of success. The author notes that the program reached a high of $10 million in state financing, but the money generated additional funds, reaching almost $12 million, based on careful planning and good analysis of loan guarantee applications. The author believes that the State must better utilize trade experts to identify advantageous trends and position California for further success in the world market. According to the bill's legislative findings and declarations, the purpose of this bill is to restore the agricultural and renewable energy manufacturing and production sectors by retaining jobs and promoting job growth in those sectors, while improving revenue collections through an export financing loan guarantee program. SB 1465 (Yee) continued PageF 2)Renewable energy loan guarantees have proven costly to government : This bill would establish a loan guarantee program for renewable energy products (and agricultural commodities). Less than one year ago, Solar Trust of America (STA) received a $2.1 billion loan guarantee from the U.S. Department of Energy (DOE). In a press release announcing the loan guarantee, the DOE stated that "l oan guarantees play an important role in facilitating the development and deployment of innovative technologies at massive scope and scale?The project ?is expected to create over 1,000 construction jobs and approximately 80 operations jobs." Instead, on April 2, 2012, STA filed for bankruptcy. Bloomberg news reported: "The company joins Energy Conversion Devices Inc., a U.S. solar manufacturer that suspended production last year; LSP Energy LP, the owner of a natural-gas-fired power plant in Mississippi; Ener1 Inc., maker of lithium-ion batteries for plug-in electric cars; solar-panel maker Solyndra LLC; and energy storage company Beacon Power Corp. (BCONQ) in bankruptcy." Ýhttp://tinyurl.com/7alj3ex] Another California company, Solyndra, LLC, received a $535 million loan guarantee from the DOE in 2009 as part of a program to spur alternative energy growth. Solyndra and the DOE had originally estimated that this government guarantee of Solyndra's financing would help to create 4,000 new jobs. In early September 2011 the company ceased all business activity, filed for Chapter 11 bankruptcy, and laid-off nearly all of its employees. The federal government then had to pay back the loan it had guaranteed. SB 1465 (Yee) continued PageG 3)Are existing programs sufficient in any event ? a) The Small Business Loan Guarantee Program : The SBLGP<4> helps lenders make loans to borrowers who cannot qualify for conventional financing. According to BTH, it gives businesses a chance to build good working relationships with financial institutions. Most small businesses are eligible to participate in the program including corporations, partnerships, and sole proprietorships. It must be a small business with no more than 750 employees. The proceeds can be used for any business purpose, including start-up costs, working capital, business procurement, franchise fees, equipment and inventory. Funds can be used for real estate purposes related to construction, renovation or tenant improvements of an eligible place of business. Small Business Financial Development Corporations act as financial intermediaries by using their SBLGP funding allocation to secure loan and surety bond guarantees. b) State Trade and Export Promotion Grant Act : In October 2010, as part of the federal Small Business Jobs Act, Congress passed and the President signed The State Trade and Export Promotion Grant Act (STEP) which authorized $90 million in competitive grants to fund state trade promotion programs over the next three years. California is currently in the process of applying for a share of the first $30 million in STEP funds. The first $30 million round of funding for states is available under the Small Business Administration - administered STEP. Instead of BTH, the California Community College System applied for funds, under the auspices of the Centers for International Trade Development. California officials anticipate that a successful California application would result in $3 million for local and state collaborative trade promotion efforts. ------------------------- <4> On March 30, 2012, Governor Brown submitted a comprehensive Reorganization Plan to the Little Hoover Commission for review and recommendation. Among other things, the plan would move the SBLGP from the BT&H Agency to the Governor's Office of Economic Development. SB 1465 (Yee) continued PageH c) California Capital Access Program (CalCAP) : This program is administered by the CPCFA, and encourages banks and other financial institutions to make loans to small businesses that fall just outside of their conventional underwriting standards. CalCAP is a form of loan portfolio insurance which may provide up to 100% coverage on certain loan defaults. CalCAP insures loans made to small businesses to assist them in growing their business. Loans can be used to finance the acquisition of land, construction or renovation of buildings, the purchase of equipment, other capital projects and working capital. There are limitations on real estate loans and loan refinancing. d) U.S. Export-Import (EXIM) Bank : The EXIM Bank is a congressionally chartered bank whose mission is to create and sustain U.S. jobs by financing sales of U.S. exports to international buyers. The EXIM Bank does not compete with private sector lenders, but rather provides financing for transactions that would otherwise not take place because commercial lenders are either unable or unwilling to accept the political or commercial risks inherent in the deal. The EXIM Bank focuses on providing support to U.S. small businesses for export of U.S. made products. From October 2005 through September 2006 the EXIM Bank authorized $3.2 billion in financing directly to U.S. small businesses. 4)Eligibility criteria may need clarification : The bill directs the CPCFA to adopt criteria establishing which exporters and export transactions shall be eligible for the loan guarantees. It states that the criteria shall ensure that all loan guarantees will be extended "exclusively to support the export of goods, services and agricultural commodities or renewable energy products produced or grown primarily in the state?" It is the apparent intent of the author to limit the program to small businesses which are exporting renewable energy products and agricultural commodities. Thus, the terms "goods" and "services" should be removed, and small businesses should be referenced. Suggested technical amendment to proposed Section 91702 of the Govt. Code : SB 1465 (Yee) continued PageI "91702 (d) ?Pursuant to this subdivision, the authority shall adopt regulations to ensure that all of the following criteria are met: (1) Borrowers have a minimum equity interest in the business as determined by the authority. (2) The loan guarantees are extended exclusively to support the export ofgoods, services, andagricultural commodities or renewable energy products produced or grown primarily in the state bycompaniessmall businesses or agricultural enterprises commercially domiciled in the state, as defined in subdivision (b) " 5)Difficulty of certifying job creation results : The bill grants authority to the executive director of the CPCFA to "certify that exporters who borrow more than $200,000 create at least one job for each increment thereof and retain those jobs through the repayment period for the loan," and that "exporters who borrow less than $200,000 retain all jobs through repayment of the loan." Setting aside the appropriateness of the job creation standard in the bill, the basis on which this certification is to be made by the executive director is unclear, and so is the timing of the certification. The author and the Committee may wish to consider obligating the beneficiary of the loan guarantee, not the CPCFA executive director, to guarantee a specific job creation target as a condition precedent to obtaining the loan guarantee. 6)Support : Writing in support of the bill, Controller John Chiang notes that the bill is based on the highly successful former California Export Finance Office. He notes that, over its nearly 20-year life, less than two percent of borrowers defaulted, and that near its peak, in 1999-2000, the CEFO issued loan guarantees for 18 export transactions valued at $28 million, creating 227 jobs in the state. 7)Opposition : The opponents argue that creation of this SB 1465 (Yee) continued PageJ program is duplicative and establishes a competing program to the existing California Small Business Loan Guarantee Program (SBLGP). They agree that export financing is an important factor in building California's economy, but they do not believe it is fiscally prudent for the state to maintain two programs in different agencies providing the exact same services and competing for diminishing state resources. PRIOR/RELATED LEGISLATION AB 1137 (Manuel Perez) 2011-12 Session . Establishes the California Export Promotion and Gap Financing Program, and authorizes the (BT&H) agency to apply for and receive federal funding to implement a state and federal export financing program. (Pending in Senate Appropriations Committee) AB 2524 (Yee) 2003-2004 Session . Would have reestablished the Export Development Office (EDO) - formerly the California Export Finance Office (CEFO) - to provide loan guarantees to small and medium-sized California-based export businesses. (Held on Suspense in Assembly Appropriations ) SUPPORT: John Chiang, California State Controller (sponsor) OPPOSE: Association of Financial Development Corporations DUAL REFERRAL: Senate Governance and Finance Committee FISCAL COMMITTEE: Senate Appropriations Committee **********