BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 32 HEARING: 8/14/13
AUTHOR: J. Pérez FISCAL: Yes
VERSION: 4/17/13 TAX LEVY: Yes
CONSULTANT: Grinnell
COMMUNITY DEVELOPMENT FINANCIAL INSTITUTION TAX CREDIT
Extends and expands the Community Development Financial
Institution credit.
Background and Existing Law
Federal law allows a new markets tax credit for taxpayer's
qualified equity investments in community development
entities, the primary mission of which must be serving or
providing investment capital for low-income communities or
low-income persons, as certified by the Secretary of the
Treasury. The federal credit is equal to 39% of the
qualified equity investment and is spread over seven years.
State law does not conform to the federal new markets
credit, but instead allows the Community Development
Financial Institution credit (CDFI), administered by the
Department of Insurance (DOI) (AB 1520, Vincent, 1997).
Taxpayers may claim a credit against the Gross Premiums
Tax, Personal Income Tax, or Corporation Tax equal to 20%
of qualified investments in the form of non-interest
bearing deposits, loans, or equity investments of at least
$50,000 held for at least 60 months. Taxpayers can carry
over the credit for four years.
The credit was initially used only to reduce Personal
Income Tax, or Corporation Tax liabilities, but the
Legislature added a credit against the Gross Premiums Tax
in 1999, also administered by DOI (AB 157, Vincent). In
2002, the Legislature extended the credit until 2007 (SB
409, Vincent), again until 2012 (AB 2831, Ridley-Thomas,
2006), and once more until 2017, but only allowed DOI to
certify new deposits for credits until January 1, 2015 (AB
624, J. Pérez, 2011).
AB 32 - 4/17/13 -- Page 2
For deposits to generate credits, CDFI must be certified by
the California Organized Investment Network (COIN), an
office in DOI, by demonstrating that it is a private
financial institution located in California, its primary
mission is community development, and that it lends in
urban, rural or reservation-based communities in
California. CDFIs may be banks, credit unions, or
non-regulated non-profit institutions organized to provide
private capital for community development or investing.
There are currently 27 CDFIs in California, down from 50 in
2011. CDFIs must use the proceeds of the investment for a
purpose that is consistent with its community development
mission and for the benefit of economically disadvantaged
communities and low-income people in California.
CDFIs must apply to COIN on behalf of the taxpayer. COIN
certifies the amount of the investment and the credit,
which is capped at a total of $10 million each year, but
any unused amount from past years may be carried over to
future ones. COIN generally allocates the credits on a
first-come, first-served basis; however, if COIN determines
that the total amount of investment will exceed the cap, it
can prioritize applications with investments that directly
benefit low-income persons, or prioritize rental housing,
mortgages for community-based residential housing, and
self-help housing ahead of single-family housing. DOI or
the Franchise Tax Board (FTB) may recapture the credit
within the 60 month period if the taxpayer reduces or
withdraws the investment.
Proposed Law
Assembly Bill 32 increases from $10 million to $50 million
the amount of investments COIN can certify for CDFI credits
each year. The measure restricts the amount of investments
COIN can certify for any one CDFI, combined with its
affiliates to 30% of the annual total, unless COIN
determines after October 1 that the supply of credits
exceeds demand. Additionally, the measure sets aside 10%
of the annual total for investments of less than $200,000,
again unless COIN determines after October 1 that the
supply of credits exceed demand.
The measure also modifies the requirement for COIN to
prioritize applications when credit demand exceeds supply
AB 32 - 4/17/13 -- Page 3
to place priority on affordable rental housing, housing for
veterans, and self-help housing ahead of single-family
homes.
The bill also extends the date before which COIN can
certify investments from January 1, 2015 to January 1,
2017.
State Revenue Impact
According to FTB, AB 32 results in revenue losses of $1.2
million in 2013-14 and 2014-15, and $1.5 million in
2015-16. This estimate does not include revenue losses due
to credits applied against the Gross Premiums Tax.
Comments
1. Purpose of the bill . According to the author, "From
1997-2012 the CDFI Tax Credit and Certification Program has
leveraged $27 million in tax credits to generate $135
million in CDFI deposits in California's most underserved
communities. Over the last several years, the COIN program
has been oversubscribed and with a cap on the amount of
investments it has been unable to meet the demand for
capital. The increase in the investment amount proposed
under AB 32 as well as the other programmatic changes will
allow for more COIN capital to be deployed, more projects
to be built, more jobs to be created and more investors to
participate. Community development investments make sound
business sense and provide solid returns while bringing
much needed capital to low-income communities."
2. Policy Questions . Taxpayers claiming the CDFI include
some of the world's largest financial institutions and
insurance companies, including Pacific Life Insurance
Company, JP Morgan Chase, and Blue Shield of California.
These firms are highly sophisticated investors, and
allocate billions of dollars daily in various asset
classes. The credit AB 32 seeks to extend and expand
AB 32 - 4/17/13 -- Page 4
subsidizes these firms' investment in CDFIs with the intent
that capital will flow to productive uses in low-income
communities in California. As such, AB 32 poses three
major policy questions:
First, is it the proper role of the state to use
tax credits to direct private investment decisions?
These firms are successful because of their expertise
in intermediating capital, and would deposit funds in
CDFIs if it made sense from an asset allocation
perspective. Because tax credits are funded by
forgoing revenue that could be used for other
government services or tax reductions, is increasing
and extending the CDFI credit both appropriate and
worth the cost?
Second, if the state wants to direct investment
into low-income areas, the CDFI credit is a tool that
serves as a carrot, not a stick. Federal law's
Community Reinvestment Act (CRA) provides considerable
regulatory encouragement for federally-regulated banks
to invest in low-income areas. Instead of tax
credits, California could adopt its own CRA and
require banks and insurance companies to invest in
specified areas as a condition of doing business in
the state.
Lastly, is the CDFI scalable? Simply because
taxpayers are claiming more tax credits today than in
previous years doesn't necessarily mean that it's
successful, as evidenced by now-repealed Enterprise
Zone tax credits, in which credit usage grew as the
economies within the zones stagnated. AB 32's
quintupling of the credit amount is an affirmative
statement that the credit is highly successful, and
more is better. What evidence indicates that
increasing CDFI credits will lead to more economic
growth in these areas?
3. Growing appetite . After many years of lack of demand
for CDFI credits, efforts by Insurance Commissioner Dave
Jones have increased demand for the credits. Because of
this increase, the Commissioner argues that AB 32's
increase in the cap is necessary as many taxpayers want to
make investments, but this year's allocation plus carryover
amounts from previous years have already been claimed.
According to DOI, insurance companies generally make
investments in the third and fourth quarters of the year,
and, CDFIs will make deposits and put them to work this
AB 32 - 4/17/13 -- Page 5
year should AB 32 be enacted. However, is this problem
more a result of the first-come, first-served methodology
for allocating credits? The law directs COIN to certify
investments that qualify when they come in the door - only
later in the year can COIN prioritize some applications
over others (See Comment #7). The Committee may wish to
consider whether the CDFI credit should be expanded as AB
32 calls for, or whether it should delete the first-come,
first-served method in favor of an allocation system that
identifies stronger applications.
4. Measuring performance . CDFIs apply to COIN to certify
the amount of the investment eligible for the credit;
however, the CDFI isn't required to state the projects it
funds using the increment of investment proceeds that
generate credits for investors. While COIN reviews a
CDFI's general lending practices, collects and publishes
information about investors, the amount of the investment,
and the CDFI receiving it, no information exists about the
specific projects that happen due to the credit that
wouldn't without it. Without information showing the
specific things the state bought with the foregone revenue
that funds the tax credit, how can the Legislature
accurately measure the CDFI credit's performance?
Additionally, COIN's records generally list the identity of
the investor, but not always, sometimes listing "private
investor." The Committee may wish to consider requiring
CDFIs to specify the projects that will be funded using the
deposits that give rise to tax credits, and identify the
taxpayers that receive the credits.
5. LAO's take . AB 2831 (Ridley-Thomas) required the LAO
to prepare an analysis of the CDFI credit. LAO's April 14,
2011 letter to the Chair of the relevant committees in the
Assembly and Senate included four conclusions, among them:
Economic Impact. It is very difficult to
estimate the impact of the tax credits, although
we suspect that in many cases investments in the
CDFIs would not have been made in the credit's
absence. It is true 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. Even in these
cases it seems likely that the tax credits helped
generate investment activity that otherwise might
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not have been funded.
Credit Percentage Seems Reasonable. This
credit is set up like most in-vestment credits in
that it refunds a percentage of the invested
amount, and 20 percent is the equivalent of about
2.5 to 3 percentage points on a ten-year loan at
prevailing interest rates. This is about
one-half of the interest rate spread between a
fairly safe investment and a very risky one. For
example, recently, the difference between the
rates on a BBB (low investment-grade) bond and a
CCC ("junk") bond was about 6 percent. While we
have no reason to believe that a 20 percent
subsidy is too high or too low, it is possible
that changing conditions in financial markets in
the future could warrant a different subsidy
percentage for this credit.
Owned Versus Rental Housing. The CDFIs
have supported both rental and owner-occupied
housing, including both construction and mortgage
loans. Credit standards for home purchase loans
have increased markedly since the collapse of the
housing market. In order to benefit lower-income
individuals, it may make sense for housing
development efforts to focus more on rental
housing at least in the near future.
Accordingly, the Legislature may wish to consider
focusing the tax credit more on CDFI investments
in rental housing opportunities to benefit
low-income populations. NOTE - AB 624 allows DOI
to prioritize rental housing and other use over
single-family homes if total investments exceed
the legal cap.
First-Come, First-Served Tax Credits Can
Be Problematic. In some prior years, the program
has hit its annual cap. If the credit is retained
in its current form, it may be advisable to
authorize COIN or some other entity to award the
credits competitively instead of on a first-come,
first-served basis. This might allow the state
to prioritize CDFI investments that best fit
desired policy objectives-for example, by
directly benefiting lower-income people instead
of benefiting projects that merely are located in
lower-income areas
AB 32 - 4/17/13 -- Page 7
6. Recent history . In 2011, the Committee heard AB 624
(J. Perez), which would have doubled the amount of the CDFI
credit and extended the authorization for DOI to certify
investments for the credit until January 1, 2017. The
Committee approved the bill with amendments that deleted
the doubling of the investment amount, extended the ability
for taxpayers to claim the CDFI credit until 2017, but
didn't allow DOI to certify new investments after January
1, 2015.
7. Amendment Options . Should the Committee want to
approve AB 624, but make changes to the CDFI credit
program, it could amend the bill to:
Prohibit or lower the priority for credit
allocations those investments by banks and financial
institutions required by CRA, thereby ensuring that
California isn't subsidizing compliance with existing
federal law;
Grant regulatory authority to COIN to adopt a
scoring process that allows it to set goals and
evaluate applications to direct available resources
toward the best projects;
In combination with requiring CDFIs to disclose
specific projects and taxpayers as suggested in
Comment #3, change the bill's prioritization of rental
housing projects being affordable to a requirement,
similar to state and federal low-income housing tax
credits; and
Delete or reduce the bill's expansion of the annual
amount of investment that generates a credit from $10
million to $50 million.
Defer action on the measure, as the CDFI credit
does not sunset until
January 1, 2015.
Assembly Actions
Assembly Revenue and Taxation 9-0
Assembly Appropriations 16-0
Assembly Floor 77-1
Support and Opposition (08/08/13)
Support : 3CORE Financial Mentoring Perspective; American
AB 32 - 4/17/13 -- Page 8
Federation of State, County and Municipal Employees;
Association of California Life and Health Insurance
Companies; California Department of Insurance (sponsor);
California United Bank; Century Housing Corporation;
Clearinghouse Community Development Financial Institution;
Corporation for Supportive Housing; Enterprise Community
Investments, Inc.; Farmers Insurance Group; Grossman
Financial Management; InSight at Pacific Community
Ventures; Karuk Community Loan Fund, Inc.; Los Angeles LDC;
Northeast Community Federal Credit Union; Northern
California Community Loan Fund; Opportunity Fund Northern
California; Pacific Coast Regional Small Business
Development Corporation; Personal Insurance Federation of
California; Rural Community Assistance Corporation;
Roxborough, Pomerance, Nye and Adreani, LLP; San Luis
Obispo Housing Trust Fund; Self-Help Federal Credit Union;
The Association of Financial Development Corporation.
Opposition : Unknown.