BILL ANALYSIS                                                                                                                                                                                                    Ó


          |SENATE RULES COMMITTEE            |                         AB 32|
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                                    THIRD READING

          Bill No:  AB 32
          Author:   John A. Pérez (D)
          Amended:  9/3/13 in Senate
          Vote:     27

           SENATE GOVERNANCE & FINANCE COMMITTEE  :  7-0, 8/14/13
          AYES:  Wolk, Knight, Beall, DeSaulnier, Emmerson, Hernandez, Liu

           SENATE APPROPRIATIONS COMMITTEE  :  7-0, 8/30/13
          AYES:  De León, Walters, Gaines, Hill, Lara, Padilla, Steinberg
          ASSEMBLY FLOOR  :  77-1, 5/28/13 - See last page for vote

           SUBJECT  :    Insurance taxes:  income taxes:  credits:  community  

           SOURCE  :     Department of Insurance

           DIGEST  :    This bill increases from $10 million to $50 million  
          the amount of investments the California Organized Investment  
          Network (COIN) can certify for the Community Development  
          Financial Institution Credit (CDFI) credits each year.  This  
          bill 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, this bill 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.



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           ANALYSIS  :    

          Existing law:

          1. Authorizes a credit against the Insurance Gross Premiums Tax  
             (IT), Personal Income Tax (PIT) or Corporation Tax (CT), in  
             an amount equal to 20% of a qualified investment made by a  
             taxpayer into a CDFI.

          2. Limits that 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 a 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  
             (DOI), 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, ad a community  
             development venture fund. 

          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.



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             C.    Represent investments from insurance companies  
                subject to tax under Section 12201 of the Revenue and  
                Taxation Code or under Section 28 Article XIII of the  
                California Constitution.

          6. Allows a carry-forward of the unused CDFI credit up to four  
             taxable years, or until the credit has been exhausted,  
             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.

          This bill:

           1. Increases from $10 million to $50 million the amount of  
             investments COIN can certify for CDFI credits each year.   
             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, 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.

           2. Modifies the requirement for COIN to prioritize applications  
             when credit demand exceeds supply to place priority on  
             affordable rental housing, and housing for veterans. 

           3. Extends the date before which COIN can certify investments  
             from January 1, 2015 to January 1, 2017.

           4. Requires the Insurance Commissioner to establish tax credit  
             issuance cycles throughout the year as necessary in order to  
             issue tax credit certificates to those applications granted  
             the highest priority.

           5. Allows the Commissioner, from time to time, to adopt, amend,  
             or repeal regulations to implement the provisions of this  
             bill.  The initial adoption of the regulations implementing  
             this bill shall be deemed to be an emergency and necessary in  



                                                                      AB 32

             order to address a situation calling for immediate action to  
             avoid serious harm to the public peace, health, safety, or  
             general welfare.

           6. Requires the Legislative Analyst's Office (LAO) to submit a  
             report by June 30, 2016 to the Legislature on the effects of  
             the tax credits allowed, with a focus on employment in  
             low-to-moderate income and rural areas, and on the benefits  
             of these tax credits to low-to-moderate income and rural  

          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 CDFI, administered by the DOI (AB 1520  
          (Vincent), Chapter 947, Statutes of 1997).  Taxpayers may claim  
          a credit against the IT, PIT, or CT 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 PIT, or CT  
          liabilities, but the Legislature added a credit against the IT  
          in 1999, also administered by DOI.  In 2002, the Legislature  
          extended the credit until 2007, again until 2012, and once more  
          until 2017, but only allowed DOI to certify new deposits for  
          credits until January 1, 2015 (AB 624 (J. Pérez), Chapter 436,  
          Statutes of 2011).

          For deposits to generate credits, CDFI must be certified by  
          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  



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          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.  

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  Yes    
          Local:  No

          According to the Senate Appropriations Committee:

             The tax credit is equal to 20% of the invested amount, up to  
             $50 million, for a statewide total tax credit capped at $10  
             million, compared to existing law, which caps the tax credit  
             at $2 million.  The actual cost each year will vary because  
             if the aggregate amount of the qualified investments made in  
             any calendar year is less than $50 million, the unused amount  
             may be carried over to the next year and any succeeding year.  

             FTB estimates the proportion of total revenue loss resulting  
             from the PIT and CT provisions would be approximately $1.5  
             million annually.  FTB indicates that this bill will not  
             significantly impact its costs. 

             DOI would incur costs of $428,000 in 2003-14, $571,000 in  
             2014-15, and $604,000 in 2015-16 to implement the provisions  
             of this bill, specifically, certifying CDFIs, marketing the  
             CDFI tax credit program, and qualifying, monitoring and  
             reporting CDFI tax credit investments.



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           SUPPORT  :   (Verified  8/30/13)

          Department of Insurance (source)
          3CORE Financial Mentoring Perspective
          Association of California Insurance Companies
          Association of California Life and Health Insurance Companies
          California United Bank
          Century Housing Corporation
          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
          Nehemiah Community Reinvestment Fund
          Northeast Community Federal Credit Union
          Northern California Community Loan Fund
          Opportunity Fund Northern California
          Pacific Coast Regional Small Business Development Corporation
          Pacific Life Insurance Company
          Personal Insurance Federation of California
          Rural Community Assistance Corporation
          The Association of Financial Development Corporation

           OPPOSITION  :    (Verified  8/30/13)

          Department of Finance

           ARGUMENTS IN SUPPORT  :    According to the author, "the bill  
          would also ensure the availability of tax credit investment  
          opportunities for CDFIs and their investors by limiting the  
          amount of tax credit that may be allocated to each investor; set  
          aside 10% of the qualified investments for investment amounts of  
          $200,000 or less; if the program is oversubscribed and there are  
          applications that support housing, priority within those  
          applications will be given to applications that support  
          affordable rental housing, housing for veterans, mortgages for  
          community- based residential programs, and self- help housing  
          ahead of single-family owned housing; require the Insurance  
          Commission to establish tax credit issuance cycles throughout  
          the year, and allow the COIN to certify investments until the  



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          January 1, 2017 sunset date."

           ARGUMENTS IN OPPOSITION  :    The Department of Finance is opposed  
          to this bill because it results in annual General Fund losses.   
          This bill is intending to incentivize capital investment into  
          low-to-moderate income areas; however, it is
          unclear that these projects are not able to get funding absent  
          the increase in the tax credit.  
           ASSEMBLY FLOOR  :  77-1, 5/28/13
          AYES:  Achadjian, Alejo, Allen, Ammiano, Atkins, Bigelow, Bloom,  
            Blumenfield, Bocanegra, Bonilla, Bonta, Bradford, Brown,  
            Buchanan, Ian Calderon, Campos, Chau, Chávez, Chesbro, Conway,  
            Cooley, Dahle, Daly, Dickinson, Eggman, Fong, Fox, Frazier,  
            Beth Gaines, Garcia, Gatto, Gomez, Gonzalez, Gordon, Gorell,  
            Gray, Grove, Hagman, Hall, Harkey, Roger Hernández, Jones,  
            Jones-Sawyer, Levine, Linder, Logue, Lowenthal, Maienschein,  
            Mansoor, Medina, Melendez, Mitchell, Morrell, Mullin,  
            Muratsuchi, Nazarian, Nestande, Olsen, Pan, Patterson, Perea,  
            V. Manuel Pérez, Quirk, Quirk-Silva, Rendon, Salas, Skinner,  
            Stone, Ting, Wagner, Waldron, Weber, Wieckowski, Wilk,  
            Williams, Yamada, John A. Pérez
          NOES:  Donnelly
          NO VOTE RECORDED:  Holden, Vacancy

          AB:dk  9/3/13   Senate Floor Analyses 

                           SUPPORT/OPPOSITION:  SEE ABOVE

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