BILL ANALYSIS �
AB 780
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Date of Hearing: April 23, 2013
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
Jose Medina, Chair
AB 780 (Bocanegra) - As Amended: February 21, 2013
SUBJECT : Small business financial development corporations
SUMMARY : Appropriates $2 million from the General Fund for the
purpose of providing administrative funding to the state's small
business financial development corporations (FDCs). Each FDC is
eligible to receive $150,000. This bill also states that it is the
Legislature's intent that the FDCs are to be under the jurisdiction of
the Governor's Office of Business and Economic Development (GO-Biz).
EXISTING LAW
1)Authorizes the approval of 11 FDCs by BTH for the purpose of
administering a number of small business finance programs including
the Small Business Loan Guarantee Program (SBLGP), direct loans,
disaster assistance loans and surety bond guarantees.
2)Establishes the SBLGP for the purpose of assisting small businesses
in obtaining long-term loans or lines of credit from conventional
financial institutions, which small businesses would not otherwise
qualify for without the guarantee. Under this program, FDCs act as
financial intermediaries between the state, the small business, and
the financial institution.
3)Establishes the California Small Business Expansion Fund (Expansion
Fund) for the purpose of retaining the moneys which separately
capitalize the SBLGP and paying out defaulted loan guarantees issued
under the SBLGP. Each account within the Expansion Fund is legally
separate and is prohibited from securing loan guarantees or other
obligations of another FDC. The state is not liable or obligated
beyond the funds allocated and deposited in an individual trust fund
account within the Expansion Fund.
FISCAL EFFECT : Unknown
COMMENTS :
1)Author's Purpose : According to the author, "FDCs serve the backbone
of the California economy-small businesses. Established more than
40 years ago, FDCs have a proven track record of helping businesses
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create and retain jobs. In the last decade they've helped retain
101,248 jobs and created 19,970. More specifically, FDCs have
excelled with help from the Small Business Loan Guarantee Program
[SBLGP].
In 2010, the federal Jobs Act brought $168 million to California to
help stimulate job growth. Despite their track record, since 2008
FDCs' administrative budgets have taken unnecessary reductions. As
a result, staffing levels-and by extension the ability of these FDCs
to get loans out the door-dropped significantly. In 2006, California
funded FDCs' administrative budgets to the tune of $4 million.
Loans reached 1357. Since 2008, when their budgets were slashed,
loans dipped to less than 356. The federal rules require California
to obligate its share of funds by 2017 or the funds remit back to
the US Treasury. Without the administrative support that we've
historically given them, our FDCs stand to lose out on more than $50
million in federal funding and more than $500 million in leveraging
opportunities. That's less job creation at a time when California's
unemployment rate is tied for last in the country."
2)Framing the Policy Issue : The measure proposes the appropriation of
$2 million for the purpose of supplementing FDC administrative
funds, which will allow them to assist small business access up to
$84 million in loan guarantees.
Paying administrative costs for delivering federal block grants is
an issue that the state has long struggled. From the federal
government's perspective, it does not seem unreasonable to expect
states to cover state-side administrative costs when they are
sending $168 million to implement the capital access program of the
state's choice.
In the past, California's failure to provide administrative funds
has resulted in the loss of federal dollars to other states, as in
the case of the Small Business Development Center Program; penalties
in future program years, as is the case of the Small Cities
Community Block Grant Program; and an inability to obtain the
maximum leverage of federal dollars, as in the case of the disabled
veteran opportunity. The analysis includes additional details on
California's small business economy, the SBLG Program, the federal
Small Business Jobs Act, and related legislation. Amendments
requested by the Business Transportation and Housing Agency, (BTH)
are discussed in comment 7.
3)California Small Business : California's dominance in many economic
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areas is based, in part, on the significant role small businesses
play in the state's $1.9 trillion economy. Businesses with less
than 100 employees comprise nearly 98% of all businesses, and are
responsible for employing more than 37% of all workers in the state.
Among other advantages, small businesses are crucial to the state's
international competitiveness and are an important means for
dispersing the positive economic impacts of trade within the
California economy. California small businesses comprised 96% of
the state's 60,000 exporters in 2009, which accounted for over 44%
of total exports in the state. Nationally, small businesses
represented only 31.9% of total exports. These numbers include the
export of only goods and not services.
Historically, small businesses have functioned as economic engines,
especially in challenging economic times. During the nation's
economic downturn from 1999 to 2003, microenterprises (businesses
with fewer than five employees) created 318,183 new jobs or 77% of
all employment growth, while larger businesses with more than 50
employees lost over 444,000 jobs. From 2000 to 2001,
microenterprises created 62,731 jobs in the state, accounting for
nearly 64% of all new employment growth. More recently, the federal
Small Business Administration's Small Business Economy 2011 report,
stated that small businesses nationally outperformed large firms in
net job creation nearly three out of four times from 1992 through
2010 when private-sector employment rose.
During the recent economic downturn, however, small business owners
were especially hard hit. Equifax reported that bankruptcies in
California rose by 81% in 2009, as compared to 44% nationally. This
trend continued in 2010 where the Equifax report stated that while
in general bankruptcies were down across the nation including some
regions in the west, small business bankruptcies in California
accounted for almost 20% of all small business bankruptcies in the
nation.
4)Small Business Loan Guarantee Program : The SBLGP enables a small
business to obtain a term loan or line of credit when it cannot
otherwise qualify for a loan on its own. The state, working through
11 FDCs, offers direct loans or loan guarantees that a qualifying
small business borrower could not otherwise obtain.
Applicants must meet the definition of a small business (100 or
fewer employees) with the specific market rate loan terms and
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interest rates being negotiated between the borrower and the lender.
Proceeds of the loan must be used primarily in California for any
standard business purpose applicable to the applicant's business.
The guarantee program provides guarantees covering up to 90% of the
loan, but not exceeding $500,000. The guarantee program allows a
business to not only obtain a loan but to also establish credit with
a lender. The business is then more likely to obtain additional
future financing on its own.
In 2011-12, approximately $5.7 million was made available for loan
guarantees under the state SBLGP, which leveraged $9.9 million in
small business loans from financial institutions. During this
period 178 guarantees were provided, creating and/or retaining over
1,200 jobs. There are currently 1,046 loans being guaranteed under
the state program.
5)Small Business Jobs Act and Federal Guarantee Program : In October
2010, Congress passed and the President signed the Small Business
Jobs Act (Act). Among other things, the Act created the State Small
Business Credit Initiative (SSBIC), which is authorized to expend up
to $1.5 billion for state sponsored small business finance programs.
Over the life of the program, every federal dollar must be matched
by $10 private sector dollars. September 2017 is the deadline for
using the funds. Funding for the administration, outreach, and
oversight of the program is primarily the responsibility of the
state.
Under the funding formula, California is eligible to receive up to
$168 million, which is the largest amount of any state. The next
highest award is $97 million for Florida, with every state that
applies receiving a minimum of $13.1 million. California uses its
moneys to capitalize the SBLGP administered through BTH and a loss
reserve program and collateral support program administered through
the California Pollution Control Financing Authority at the state
Treasurer's Office.
Funding is awarded to states in three tranches with participating
jurisdictions allowed to apply for the next round of funding when
80% of their current funds are expended. Nine of the 57
participating jurisdictions have received second round funding and
three states are into their third and final round.
Of the $68 million California received in the first round,
California has encumbered $16.6 million, with approximately $13.4
million set aside to cover loan guarantees under the federal portion
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of the SBLG Program. Over 18, 600 jobs have been created or
retained by the close of 2012.
In 2011-12, approximately $36.2 million in guarantees were made
under the federal SBLGP, which leveraged $58.2 million in small
business loans from financial institutions. During this period, 203
guarantees were provided, creating or retaining 6,000 jobs through
guarantee activities.
There are currently 297 loans being guaranteed under the federal
program, 85% have been to businesses in low- and moderate-income
areas. Approximately 19% of the loans have been in the
accommodation and food services, 15% in construction, and 9.5% in
real estate and leasing, and 9.2 in retail trade. Relative to size
of business, 46.7% has had 11 to 50 employees and 36.8% have had
less than 10 employees.
According to the FDCs, one impediment to getting the SBLGP portion
out is the lack of state administrative support. Repeated budget
actions have severally limited ongoing management funds and crippled
the state portion of the program, which allowed greater programmatic
flexibility in serving the needs of small businesses.
JEDE will hear three measures which are designed to enhance the
program and help to facilitate the drawdown of additional federal
dollars. AB 201 (Holden) encourages greater private financial
institution participation; AB 1247 (Medina) makes programmatic
changes to streamline the program; and, AB 780 (Bocanegra)
appropriates $2 million for FDC administrative costs.
6)FDC Funding : Historically, the state has provided for a portion of
the FDCs administrative costs through an annual payment that has
ranged from $120,000 to $418,000 a year. FDCs are paid an
additional fee per loan based on a percentage of the loan value. In
the last few years, both the state administrative costs and program
dollars available for FDC guarantees have shrunk significantly
requiring many of the 11 FDCs to lay-off employees and/or not
replace vacated positions. As an example, total loan guarantee
volume went from 1,035 in 2008/09 to only 178 in 2011/12.
As California was preparing to receive the federal funding the
Legislative Analyst Office opined that the receipt of the federal
dollars would mean the state could begin to back out its
administrative support for the program. This decision to pay lower
administrative costs is jeopardizing the state's ability to draw
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down all available federal funds. Most recently, administrative
costs to the FDCs under both the state and federal program were only
$185,090, which is hardly sufficient to successfully deliver tens of
millions in loan guarantees to the state's small businesses.
In discussion with committee staff, the U.S. Treasury was quite
clear that each state was expected to address administrative costs
for the programs that chose to operate. Federal guidelines limit
administrative costs in the first tranche to 5%, 3% in the second
and no administrative costs are allowed in the final installment.
AB 780 is an important step in ensuring FDCs have the capacity to
deliver the federal and existing state program by providing each FDC
with an additional $150,000.
7)BTH Amendments : In an unusual move for a state agency so early in
the year, BTH offered to go neutral on AB 780 if the author was
willing to take an amendment that $1.65 million of the funds would
be distributed to FDCs in accordance to set of performance
indicators which would be developed by the program manager and
approved by GO-Biz. The purpose of the additional $350,000 would
also need to be clarified, pursuant to the letter. The author is
still considering the amendments.
If the amendments are taken, the committee may wish to provide some
framework as to how the performance indicators would be applied, as
possibilities vary widely. As an example, the funds could be
awarded based on which FDCS moved the largest volume of guarantees,
or the FDCs that had to least current capacity to deliver the
program, or the region with the greatest unmet small business
capital need, or which FDCS fill paperwork out the best. As
currently designed, the bill proposes each FDC would receive
$150,000.
8)Governor's Office of Business and Economic Development : In April
2010, the Governor's Office of Economic Development was established
to provide a One-Stop-Shop for serving the needs of businesses and
economic developers. While initially established through Executive
Order S-01-10, the office was later codified and renamed as GO-Biz,
in AB 29, Chapter 475, Statues of 2010. In 2012, GO-Biz directly
assisted 5,308 companies, resulting in the creation and/or retention
of 9,050 jobs and $1.45 billion in investments.
Among other programs, GO-Biz provides permit and other business
assistance for new and expanding businesses, as well as
administering the California Innovation Hub Program under an initial
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partnership with the statewide network of SBDCs. GO-Biz also
oversees the Office of the Small Business Advocate, who advocates
for and provides key information to small businesses. Up until
January 1, 2013, the California SBDC Program was co-located at
GO-Biz.
In March 2012, the Governor initiated a reorganization process to
realign the state's administrative stricture. Key changes were
proposed and agreed to by the Legislature including the dismantling
of the Business, Transportation and Housing Agency (BTH) and the
shifting of a number of key programs and services to GO-Biz
including:
The Small Business Loan Guarantee Program;
The California Travel and Tourism Commission;
The California Film Commission;
The Film California First Program; and
The Infrastructure and Economic Development Bank (I-Bank).
In addition, the Governor called for the placement of the California
SBDC Program within GO-Biz. Programmatic approval of the
reorganization was granted in July 2012 and will become effective
July 2013. Legislation is, however, also necessary to statutorily
reflect the reorganization changes.
1)Audit of Federal Program : In May of 2012, the U.S. Treasury Office
of the Inspector General (OIG) submitted its first audit of the
SSBIC Program. As the largest recipient of federal funds and the
being one of the earliest program providers, California was the
subject of the first audit. OIG found that a majority of the $3.6
million that had been expended at the time of the audit had been
properly used, however, three issues arose during the course of the
audit. First, $133,250 in SBLGP funds were found to not comply with
program requirements and the amount of those funds had to be
returned to Treasury.
Second, approximately 58% of the loans did not have all the required
borrower and lender assurances. U.S. Treasury agreed to address the
collection of the lender and borrower assurance, but asserted that
the documents were unnecessary as each state's quarterly reports
were already mandated to serve that purpose, pursuant to Article 4.7
of the Allocation Agreement between each state and Treasury. While
California had provided the quarterly reports, the OIG sample of
loan documentation suggested that the reports were materially
inaccurate. Since this time, required documentation has been
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provided.
Finally, $160,000 in state administrative costs was determined to
have inadequate documentation. The state agreed to provide
supplemental information on the use of the funds and staff is not
aware of the final disposition of this finding.
2)Related Legislation : Below is a list of related legislation.
a) AB 29 (John A. P�rez) Codification of GO-Biz : This bill
establishes GO-Biz within the Governor's Office for the purpose
of serving as the lead entity for economic strategy and marketing
of California on issues relating to business development, private
sector investment and economic growth. The bill also transfers
the Office of the Small Business Advocate from BTH to GO-Biz.
Status: Signed by the Governor, Chapter 475, Statutes of 2011.
b) AB 1247(Medina) Restructure of the FDC Programs : This bill
repeals and recasts the provisions of the FDC small business
financing programs from BTH to GO-Biz. Status: Pending in the
Assembly Committee on Jobs, Economic Development and the Economy.
c) AB 201 (Holden) Financial Institution Participation in FDC
Programs : This bill requires the names of the financial
institutions and financing companies that make direct loans that
include credit enhancements offered by FDCs be posted on the
website of the Business and Consumer Services Agency. Status:
Pending in the Assembly Committee on Jobs, Economic Development
and the Economy.
REGISTERED SUPPORT / OPPOSITION :
Support
California Coastal Rural Development Corporation
The Valley Economic Development Center
Opposition
None received
Analysis Prepared by : Toni Symonds / J., E.D. & E. / (916)
319-2090
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