BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                               AB 1247
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       Date of Hearing:   April 23, 2013

          ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
                                 Jose Medina, Chair
                    AB 1247 (Medina) - As Amended:  April 17, 2013
        
       SUBJECT  :  Business investments: Small Business Financial Assistance  
       Act of 2013

        SUMMARY  :  Transfers the administration of the small business financial  
       development corporation (FDC) managed programs from the Business,  
       Transportation and Housing Agency (BTH) to the California  
       Infrastructure and Economic Development Bank (I-Bank) within the  
       Governor's Office of Business and Economic Development (GO-Biz), as  
       well as clarifying a number of administrative and programmatic  
       elements to improve program delivery.  Specifically,  this bill  : 

       1)Repeals and recasts the statues related to the establishment,  
         operations and oversight of the FDC managed programs from BTH to the  
         I-Bank, which is relocated to GO-Biz.  No additional substantive  
         changes are proposed.

       2)Repeals and recasts the statutes related to the small business  
         finance programs administered by the FDCs from the Corporations  
         Code, as overseen by BTH to the Government Code, as overseen by the  
         I-Bank.

       3)Changes the name of the lead person overseeing the FDC administered  
         finance programs from a director at BTH to a program manager at the  
         I-Bank. 

       4)Transfers and modifies the membership of the California Small  
         Business Board from a free-standing board at BTH to a subcommittee  
         of the I-Bank board of directors.

       5)Expands the list of eligible financial institutions and entities,  
         that an FDC may offer a loan guarantee to include credit unions,  
         community development financial institutions and microlenders.

       6)Clarifies that FDCs have the authority to offer direct loans.

        EXISTING LAW  

       1)Authorizes the approval of 11 FDCs by BTH for the purpose of  
         administering a number of small business finance programs including  








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         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)Framing the Policy Issue  :  This measure transfers the authority for  
         the FDC programs to the I-Bank, which is then moving under the  
         auspicious of GO-Biz.  These transfers further consolidate the  
         state's economic development programs into a single location and  
         strengthen the I-Bank's business development tool kit.

         The bill also separates the FDC-managed programs from the FDC-  
         incorporation provisions to more effectively leverage the programs  
         within the state's existing network of programs.  The analysis  
         includes information on California's small business economy, the  
         SBLGP, the federal Small Business Jobs Act, and related legislation.

        2)California Small Business  :  California's dominance in many economic  
         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  








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         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 been 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.   

        3)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  
         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.  









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         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. 

        4)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  
         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.  









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         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 since inception have been in  
         the accommodation and food services, 15% in construction, 9.5% in  
         real estate and leasing, and 9.2% in retail trade.  Relative to size  
         of business, 46.7% have 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.

        5)Governor's Office of Business and Economic Development  :  GO-Biz was  
         established in 2010 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 (John A. Pérez), 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  
         partnership with the statewide network of small business development  
         centers.  GO-Biz also oversees the Office of the Small Business  
         Advocate.

         In March 2012, the Governor initiated a reorganization process to  
         realign the state's administrative stricture.  Key changes include  
         the dismantling of the BTH and the shifting of a number of key  
         programs and services to GO-Biz including:

              The SBLGP;
              The California Travel and Tourism Commission;
              The California Film Commission; 








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              The Film California First Program; and
              The Infrastructure and Economic Development Bank.

         Programmatic approval of the reorganization was granted in July 2012  
         and will become effective July 2013.  Legislation is also necessary  
         to statutorily reflect the reorganization changes.  AB 1317 (Frazer)  
         is pending on the Assembly Floor.  The changes AB 1247 would make  
         further programmatic enhancements to the reorganization.  

        1)Related Legislation  :  Below is a list of related legislation.

           a)   AB 29 (John A. Pérez) 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 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.

           c)   AB 780 (Bocanegra) FDC Administrative Funds  :  This bill  
            Appropriates $2 million from the General Fund for the purpose of  
            providing administrative funding to the FDCs.  Each FDC is  
            eligible to receive $150,000.  The bill also states that it is  
            the Legislature's intent that the FDCs are to be under the  
            jurisdiction of GO-Biz Status:  Pending in the Assembly Committee  
            on Jobs, Economic Development and the Economy.

           d)   AB 2523 (Hueso) Loan Participation Agreements and  
            Syndications  : This bill would have authorized the I-Bank to enter  
            into participation and syndication loan agreements with financial  
            institutions for the purpose of expanding capital opportunities  
            for small businesses.  Status:  Held in the Senate Appropriations  
            Committee, 2012.

           e)   AB 2619 (V. Manuel Pérez) Start-Up California  :  This bill  
            would have established the Start-Up California Impact Investment  
            Venture Fund Program, administered through the I-Bank, for the  








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            purpose of providing equity investments to start-ups and small  
            businesses.  Status:  Held in the Assembly Committee on  
            Appropriations, 2012.  

        REGISTERED SUPPORT / OPPOSITION  :   

        Support 
        
       None received 

        Opposition 
        
       None received 
        

       Analysis Prepared by  :    Toni Symonds / J., E.D. & E. / (916) 319-2090