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                                  
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               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.





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          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.





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           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.






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            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.  





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           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.

















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           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. 





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             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  :  





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                 "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 of  goods, 
                    services, and  agricultural commodities or 
                    renewable energy products produced or grown 
                    primarily in the state by  companies   small 
                    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 





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            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


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