BILL ANALYSIS                                                                                                                                                                                                    Ó

                                                                  AB 32
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          Date of Hearing:  April 1, 2013

                                Raul Bocanegra, Chair

                      AB 32 (Pérez) - As Amended:  March 4, 2013

          Majority vote.  Tax levy.  Fiscal committee.

           SUBJECT  :  Insurance taxes:  income taxes:  credits:  community  
          development financial institution investments. 

           SUMMARY  :  Increases from $10 million to $50 million the annual  
          aggregate amount of qualified investments eligible for the  
          Community Development Financial Institution (CDFI) tax credit  
          under the Insurance Gross Premiums Tax (IT), Personal Income Tax  
          (PIT) and Corporation Tax (CT) Laws, as provided.  Specifically,  
           this bill  :

          1)Increases the $10 million annual limitation on the aggregate  
            amount of qualified investments eligible for the DCFI tax  
            credit to $50 million. 

          2)Prohibits the total amount of investments certified by the  
            California Organized Investment Network (COIN) in a calendar  
            year to any  one  CDFI, together with its affiliates, from  
            exceeding 30% of the annual aggregate amount of qualified  
            investment, except as provided. 

          3)Requires that each year 10% of the annual aggregate amount of  
            qualified investments be reserved for investment amounts of  
            less than or equal to $200,000, except as specified.  

          4)Allows COIN to certify investments for the CDFI tax credit  
            until January 1, 2017.  

          5)Revises the order of priority that is required to be granted  
            to applications for the CDFI tax credit.  

          6)Takes effect immediately as a tax levy.  

           EXISTING LAW  :
           1)Authorizes a credit against the IT, PIT or CT, in an amount  
            equal to 20% of a qualified investment made by a taxpayer into  


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            a CDFI.  

          2)Limits the annual certification of total qualified investments  
            made by all taxpayers to all CDFIs to $10 million for each  
            calendar year, but if the qualified investments are less than  
            that amount in one calendar year, the difference may be  
            carried over to future years and added to the aggregate amount  
            authorized for those years.

          3)Defines "qualified investment" as an investment that is a  
            deposit or loan that does not earn interest, or an equity  
            investment, or an equity-like debt instrument meeting federal  
            or state agency standards.  The duration of the investment  
            must be for 60 months or more and the amount must equal  
            $50,000 or more. 

          4)Defines a "community development financial institution" as a  
            private financial institution located in California that is  
            certified by the COIN Office of the Department of Insurance,  
            that has community development as its primary mission, and  
            that lends in urban, rural, or reservation communities in this  
            state.  The term "CDFI" includes a community development bank,  
            a community development loan fund, a community development  
            credit union, a microenterprise fund, a community development  
            corporation-based lender, and a community development venture  

          5)Provides that, in the event the total amount of qualified  
            investments exceeds $10 million in a calendar year, priority  
            shall be granted to those applications that meet any or all of  
            the following:

             a)   Directly benefit low-income persons.

             b)   Prioritize rental housing, mortgages for community-based  
               residential programs, and self-help housing ahead of  
               single-family owned housing. 

             c)   Represent investments from insurance companies subject  
               to tax under Section 12201 of the Revenue and Taxation Code  
               (R&TC) or under Section 28 of Article XIII of the  
               California Constitution. 

          6)Allows a carryforward of the unused CDFI credit up to four  
            taxable years, or until the credit has been exhausted,  


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            whichever occurs first.

          7)Authorizes COIN to certify investments for the credit on or  
            before January 1, 2015.

          8)Provides that the CDFI tax credit is effective until December  
            31, 2017, and as of that date is repealed.

           FISCAL EFFECT  :  The Franchise Tax Board (FTB) staff estimates  
          that the  PIT and CT tax  provisions of this bill will result in  
          an annual revenue loss of $1.2 million in fiscal year (FY)  
          2013-14, $1.2 million in FY 2014-15, and $1.5 million in FY  
          2014-15.  These estimates  do not  include the revenue impact of  
          the tax credit allowed against the insurance gross premiums tax.  

           COMMENTS  :   

           1)Author's Statement  .  The author states that, "Community  
            development investments make sound business sense and provide  
            solid returns while bringing much needed capital to low-income  
            communities.  These investments are leveraged to provide loans  
            such as small business loans, mortgage loans, and construction  
            loans.  From 1997 through 2012 more than $135 million has been  
            invested into some of California's most underserved  
            communities through the COIN program.

          "In the recent past, CDFIs across the state have made notable  
            investments, including:

                     A mortgage loan for a nonprofit residential alcohol  
                 treatment facility
                     Micro-loans of $500 to $5,000 to self-employed  
                 business owners
                     Loan for six childcare centers to serve 500  
                 low-income children
                     Pre-development loans to Habitat for Humanity to  
                 construct affordable homes
                     A loan to a church to build a child care center for  
                 low income residents
                     A loan for 953 water hook ups in two small, rural  
                     A short-term loan to close escrow on housing for  
                 low-income foster youth.


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            "The annually allocated tax credit has remained at $2 million  
            since 1997.

            "Insurer demand for COIN CDFI tax credits continues to  
            increase due to the reinvigoration of COIN.  Unmet insurer  
            appetite and underutilized CDFI capacity means the state could  
            gain significantly more insurer investment if the amount of  
            available COIN CDFI tax credits was increased. COIN staff  
            estimates a $98 million peak demand for COIN CDFI tax  

           1)Arguments in Support  .  The sponsor of this bill states that  
            COIN's goal is "to help address unmet capital needs by  
            supporting economic development, affordable housing and other  
            such investments that benefit low-income and rural communities  
            in California."  The COIN received a record number of CDFI tax  
            credit applications in 2011 and 2012, which required the COIN  
            to allocate unused tax credits from prior years.  Furthermore,  
            according to the sponsor, within days of opening the first  
            2013 CDFI tax credit application cycle, "investors and CDFIs  
            reported their intended community investment to be nearly $80  
            million on $16 million of tax credits."  Due to this increased  
            demand for tax credits, potential investors are turned away  
            and community-based projects are not receiving the full  
            benefit of this community investment.  The sponsor argues that  
            AB 32 is necessary to meet the large demand for CDFI tax  
            credit in order to increase community development investment  
            in programs and projects serving rural and underserved areas,  
            such as, for example, low-income investment fund,  
            Clearinghouse CDFI, and the Pacific Coast Regional Small  
            Business Development Corporation.  

          The proponents of this bill assert that community development  
            investments "make sound business sense and provide solid  
            returns while bringing much needed capital to low-income  
            communities."  These investments are leveraged "to provide ?  
            small business loans, mortgage loans, and construction loans"  
            and to secure additional sources of matching funds  for  
            projects such as, for example, construction of affordable  
            housing or extension of health clinic services to the  

          The proponents state that California's underserved communities  
            "are in desperate need of community development investment"  
            and that investment "in low income communities has been  


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            insufficient, resulting in a low level of economic vitality,  
            underperforming schools substandard housing, and a decline in  
            the quality of life in many rural and urban areas."  The  
            proponents argue that the COIN program is "one way to improve  
            the quality of life for Californians in the State's most  
            underserved neighborhoods."  

           2)Background:  The COIN Program  .  The COIN program was created  
            in 1996 as a public-private partnership by the Department of  
            Insurance, the insurance industry, state government leaders,  
            and community development organizations with the goal of  
            helping to address the unmet capital needs for economic  
            development and affordable housing in low-income urban and  
            rural communities throughout California.  This voluntary  
            program was established at the request of the insurance  
            industry, "as an alternative to state legislation that would  
            have required insurance companies to invest in low-income  
            urban and rural communities, similar to the federal Community  
            Reinvestment Act (CRA) that applies to the banking industry."  
            (Insurance Commissioner Urges California Insurers to Invest in  
            Low-Income Communities, Press Release, August 6, 2001).  The  
            COIN program serves as a liaison between insurers that are  
            seeking investment opportunities and the community  
            organizations that are seeking investment capital for  
            projects.  CDFIs work with COIN - an office within the  
            California Department of Insurance - as financial  
            intermediaries providing access to credit, loans, and  
            investments to small businesses and non-profits that serve  
            economically disadvantaged communities.  CDFIs also offer  
            administrative and technical assistance in these low-income  
            communities.  Generally, CDFIs lend to borrowers that do not  
            satisfy the criteria for conventional lenders and focus on a  
            particular community or certain groups of people. 

           3)The CDFI Tax Credit Program  .  In 1997, the COIN CDFI Tax  
            Credit program was created to attract and leverage private  
            capital to fund investments into CDFIs that yield economic and  
            social benefits for California's underserved markets, as well  
            as investments that yield environmental benefits.  The program  
            was set to expire at the end of 2011, but was extended until  
            January 1, 2017.  The amount of the credit is equal to 20% of  
            each qualified investment of $50,000 or more made in a  
            specified private financial institution located in California  
            - a CDFI - that has been certified by the COIN as eligible.   
            The COIN must certify each CDFI and each qualified investment.  


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          A CDFI, among other requirements, must apply to COIN for  
            certification of its status and, on behalf of a taxpayer, for  
            certification of the credit amount allocated to the taxpayer.   
            The COIN office generally approves applications on a  
            first-come, first-served basis, although it has some  
            discretion in certifying CDFIs.  If however, the COIN  
            determines that total qualified investments will exceeds $10  
            million, then priority must be granted to those applications  
            that (a) directly benefit low-income persons, (b) prioritize  
            rental housing, mortgages for community-based residential  
            programs, and self-help housing ahead of single-family owned  
            housing, or (c) represent investments from insurance  
            companies.  The COIN is required to provide the State Board of  
            Equalization or the FTB, whichever is applicable, with an  
            annual list of the names and identification numbers of any  
            taxpayers who make any withdrawal or partial withdrawal of a  
            qualified investment before the expiration of 60 months from  
            the date of the qualified investment. 

          The goal of the CDFI tax credit program is to provide incentives  
            to attract private capital investments that otherwise would  
            not be available to CDFIs.  This tax credit may be claimed by  
            taxpayers against the insurance gross premium tax, the state  
            CT, or the state PIT.  The statewide amount of the credit for  
            all recipients is capped at $2 million per year for the three  
            taxes combined.  Every $1 of the tax credit yields $5 of  
            private investment, with the total tax credit allocation of $2  
            million generating up to $10 million of private investments in  
            COIN-certified CDFIs.  However, if less than $10 million is  
            invested in qualified CDFIs in any calendar year, the  
            remaining amount may be carried over to the next year and any  
            succeeding year during which the credit remains in effect.   
            Private investments have a minimum term of 60 months, and the  
            tax credit is allocated in year one of the five-year  
            investment period.  The credit is subject to a 60-month  
            recapture period if the investment is reduced or withdrawn.   
            According to the FTB's tax expenditure report, the total  
            amount of credit claimed under the CT and the PIT Laws in 2009  
            was $250,000, and was allowed on 89 PIT and an unknown number  
            of CT returns.  

          As stated in the COIN report dated January 10, 2011,  
            approximately $1.65 million in qualified investments were  


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            approved by the COIN and $330,000 of the tax credits were  
            certified for the 2010 calendar year.  The total remaining  
            amount of investment still available for 2010 calendar year  
            was $13.7 million.  However, by July 2011, the COIN had  
            allocated $6.75 million in tax credits to insurance companies  
            and other investors, which included $2 million for 2011 and  
            $4.75 million of unused credit from prior years.  The  
            allocation translated into $33.75 million of qualified  
            community investments. 

          Most investments that qualify for the CDFI tax credit may also  
            qualify for the federal New Markets tax credit.  Furthermore,  
            those investments may also qualify for the low-income housing  
            tax credit and/or the enterprise zones (EZs) and targeted tax  
            areas deductions.  The low-income housing tax credit and EZ  
            programs are state tax programs that are also intended to  
            generate new investment and economic activity in targeted  

           4)Federal "New Markets" Tax Credit Program  .  Existing federal  
            law provides for a "new markets" tax credit that permits  
            individuals and corporate taxpayers to receive a credit  
            against their federal income taxes for making equity  
            investments in investment vehicles known as Community  
            Development Entities (CDEs).  The primary mission of a CDE is  
            to serve, or provide investment capital for, low-income  
            communities or low-income persons, as specified.  The federal  
            credit amount is equal to 39% of the value of the qualified  
            equity investment, and is spread over seven years.  Thus, in  
            each of the first three years, the federal credit amount is  
            equal to 5% of qualified contributions and in each of the  
            remaining four years the amount of credit is increased to 6%  
            of qualified contributions.  The Department of the Treasury  
            administers the program and provides allocations of the  
            federal credits to eligible community development entities  
            through a competitive grant process when Congress makes the  
            credits available.  The federal limit of the total qualified  
            investments from all taxpayers for 2011 was $3.5 billion, of  
            which $1.210 billion were allocated to California companies.  

           5)Gross Premiums Tax  .  Unlike the federal "New Markets" tax  
            credit, the CDFI tax credit is also available to insurers that  
            are subject to the gross premiums tax pursuant to the  
            California Constitution (Section 28, Article. XIII, California  
            Constitution).  The gross premiums tax is an excise tax on  


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            insurers for the privilege of transacting insurance in this  
            state.  The statutory provisions relating to the assessment  
            and collection of the tax are contained in Part 7 (commencing  
            with Section 12001) of Division 2 of the R&TC.  This tax is  
            imposed in lieu of other state and local taxes and fees,  
            making an insurer exempt from paying those charges, other than  
            real property and motor vehicle taxes and fees.  

          The economics of the insurance industry provide a key reason for  
            the special treatment of insurance companies.  Most corporate  
            taxpayers calculate their income by subtracting costs incurred  
            in the production of goods or services from the revenues  
            received from their sale.  Insurance companies, by contrast,  
            collect their revenues up front, then make payments to  
            policyholders based on contingent events that occur many  
            months or years later.  Thus, it can be difficult to "match  
            up" revenues to related expenses.  In an income tax framework,  
            insurers ideally would be allowed to deduct the current value  
            of all future obligations (claims) covered by the insurance  
            policies they have written when calculating their taxable  
            income for a given year.  Because the actual amount of these  
            obligations is uncertain, as are the amount of investment  
            earnings on accumulated premiums received during the  
            intervening period, an accurate determination of the  
            theoretically appropriate amount of taxable income proves very  
            difficult to achieve in practice.  Insurers subject to the  
            gross premiums tax do not pay tax on other forms of income,  
            such as investment income, or income earned from other trades  
            or businesses.  

           6)The Report by the Legislative Analyst's Office (LAO)  .  As  
            required by existing law, on April 14, 2011, the LAO issued an  
            analysis of the CDFI tax credit, discussing the credits'  
            fiscal impact and the resulting benefits to economically  
            disadvantaged communities and low-income people in California.  
             The LAO report noted all the following:

              a)   Economic Impact  .  While the LAO was unable to estimate  
               the economic impact of the tax credits, it states that "in  
               many cases investments in the CDFIs would not have been  
               made in the credit's absence."  The report admits that  
               "some of the credits have benefited larger CDFIs that are  
               capable of raising funds in other ways and for which the  
               credit-funded investments represent a smaller portion of  
               their total assets."  However, the LAO found that, even in  


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               those cases, the tax credits "helped generate investment  
               activity that otherwise might not have been funded."  
              b)   Credit Percentage Seems Reasonable  .  The credit refunds  
               a percentage of the invested amount, which translates into  
               approximately "2.5 to 3 percentage points on a ten-year  
               loan at prevailing interest rates," which is "about  
               one-half of the interest spread between a fairly safe  
               investment and a very risky one."  While the LAO did not  
               find a 20% subsidy to be too high or too low, it noted that  
               "changing conditions in financial markets in the future  
               could warrant a different subsidy percentage for this  
              c)   Owned Versus Rental Housing  .  In light of the higher  
               credit standards for home purchase loans since the collapse  
               of the housing market, the LAO suggests that, in order to  
               benefit low-income individuals, the CDFI tax credit program  
               should focus on investments in rental housing, at least in  
               the near future.  
              d)   First-Come, First-Served Tax Credits Can Be Problematic  .  
                Even though the tax credit is currently underutilized, at  
               some point in prior years, it was fully used.  The LAO  
               advises to authorize COIN or some other entity to award the  
               credits competitively, instead of a first-come,  
               first-served basis, to allow the state to prioritize CDFI  
               investment, if there is more demand for the credit in the  
          7)Suggested Amendments  .  Existing law provides that, if the COIN  
            determines that the total qualified investments will exceed  
            the current $10 million annual limitation, then priority must  
            be granted to those applications that meet one or all of the  
            specified requirements.  AB 32 proposes to revise the criteria  
            utilized by COIN in prioritizing applications.  However, it is  
            unclear whether applications that would support housing would  
            have priority over the applications that directly benefit  
            low-income persons or applications representing investments  
            from insurance companies.  The author may wish to consider  
            amending this bill to clarify the order of priorities. 

           8)Related Legislation  . 

          AB 624 (Pérez), Chapter 436, Statutes of 2011, extended the CDFI  


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            tax credit program from January 1, 2012 until January 1, 2017.  

          AB 2832 (Ridley-Thomas), Chapter 580, Statutes of 2006, extended  
            the operation of the CDFI tax credit program from January 1,  
            2007, until January 1, 2012. 

          SB 409 (Vincent), Chapter 535, Statutes of 2001, extended the  
            operation of the CDFI tax credit program from January 1, 2002  
            until January 1, 2007. 

          AB 1520 (Vincent), Chapter 947, Statutes of 1997, established  
            the CDFI tax credit program until January 1, 2002. 



          California Department of Insurance (sponsor)
          California United Bank
          Century Housing
          Community Loan Fund
          Diana Singleton (individual)
          Donald Stone (individual)
          Enterprise Community Investments, Inc. 
                                                                   FAME Assistance Corporation
          Los Angeles LDC
          Nehemiah Community Reinvestment Fund
          Northeast Community Federal Credit Union
          Opportunity Fund
          Grossman Financial Management
          Pacific Coast Regional
          Pacific Community Ventures
          Pacific Life Insurance Company
          Personal Insurance Federation of California
          ProAmerica Bank
          Roxborough, Pomerance, Nye & Adreani, LLP
          Rural Community Assistance Corporation
          Self-Help Federal Credit Union
          None on file
          Analysis Prepared by  :  Oksana Jaffe / REV. & TAX. / (916)  


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