BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: AB 1247 HEARING: 7/3/13 AUTHOR: Medina FISCAL: Yes VERSION: 6/18/13 TAX LEVY: No CONSULTANT: Grinnell SMALL BUSINESS FINANICAL ASSISTANCE ACT OF 2013 (URGENCY) Enacts the Small Business Financial Assistance Act of 2013. Background and Existing Law Last year, the Legislature codified in law the Governor's Office of Business and Economic Development (GO-Biz) (AB 29, Perez, 2012). Under Governor Brown's Governor's Reorganization Plan #2 (GRP#2), GO-Biz now houses the Infrastructure Bank (I-Bank), the California Film Commission, the California Tourism Commission, Small Business Centers (Small Business Development Centers), and the Small Business Loan Guarantee Program (SBLGP), effective July 1, 2013. I-Bank was previously an independent agency whilst the Business, Transportation, and Housing Agency administered the SBLGP SBLGP, working through 11 Financial Development Centers (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 percent of the loan, but not exceeding $500,000. A $33 million trust fund capitalizes both loan guarantees and direct loans, and SBLGP can only guarantee a total amount of loans equal to five times the amount in the trust fund, until 2018, when the limit reverts to its long-standing four times the trust fund. The State's General Fund only backs small business disaster loans; if defaults exceed the amount of the trust fund for any other program, the bank doesn't have recourse to the state. FDCs also administer AB 1247 - 6/18/13 -- Page 2 disaster assistance loans and surety bond guarantees on behalf of the state. AB 1247 - 6/18/13 -- Page 3 Proposed Law Senate Bill 1247 reorganizes and rearranges law guiding SBLGP by repealing the current law in place and replacing it, including placing SBLGP under the I-Bank and within GO-Biz. The measure also makes programmatic changes to SBLGP, including: Creates the program manager to administer the SBLGP, and imports the duties that are currently performed by the Small Business Board Executive Director. As part of considering whether to shift funds from one FDC to another, the project manager must consider the number of jobs created or retained by the financial product activity. Changes the Small Business Board to: o Make it an advisory board to the Governor and the Small Business Advocate on specified issues, and removes its legal responsibility to perform the tasks the bill assigns to the program manager, o Changes the composition from an eleven-member Board with the BTH Secretary as Chair with six gubernatorial appointments, plus one appointee each from the Assembly and Senate with specific qualifications, and one member each from the Assembly and the Senate, to an eleven-member board composed of the Director of Finance, the Director of the Office of the Small Business Advocate, the Treasurer, two FDC representatives, plus one appointee each from the Assembly and Senate with the same qualifications, and one member each from the Assembly and Senate. Provides that I-Bank can continue programs under the Small Business Expansion Fund, including loan guarantees, credit enhancements, direct loans, other debit instruments, disaster loan guarantees, and surety bond programs in a complementary but not competitive with commercial lenders and other state and federal programs. Places the responsibility to approve new FDCs with the I-Bank Board based on criteria that the Small Business Board currently applies, including its role to direct the program manager to establish new FDCs pursuant to its directives and requirements, including that small businesses in all areas of the state have AB 1247 - 6/18/13 -- Page 4 reasonable access to the I-Bank financial products. Directs I-Bank to adopt directives and requirements to implement the program that replace regulations adopted for the previous program, but allows the regulations to remain effective until I-Bank adopts the directives and requirements. Requires an FDC's articles of incorporation to allow removal of officers only by 2/3 vote of the directors. Provides a process for and allows FDCs to appeal the program manager's suspension decision and fund transfers to I-Bank's Executive Director, and to the I-Bank Board, if necessary. Allows an exception to the preclusion against mixing separate accounts when the program manager designates a trust fund account as shared by multiple corporations, and for more than one-third of a trust fund account to be allocated to a bond guarantee account. Provides that I-Bank directives and requirements shall guide the maximum amount a corporation may directly lend as a percentage of the trust fund, erasing the 25% cap. Allows a loan to a corporation to exceed the amount of funds likely to be lent to the business in the next three months for any kind of borrower, not just farm borrowers, and removes the current $50,000 cap on loans. I-Bank will set loan amounts in the future. Repeals the position of Small Business Board Executive Director, and its duties, as the bill vests these responsibilities along with many of the Small Business Board's duties with the executive director of the I-Bank and the I-Bank Board. Expands the definition of "financial company," to include certified community development financial institutions and microlenders for the loan guarantee program. Exempts the annual contract between the state and the FDCs from the state's general procurement process. Under the statute, the FDCs serve as a pre-selected pool of local nonprofits to administer the finance programs. Authorizes the I-Bank to make investment decisions about small business expansion fund moneys, which is consistent with existing I-Bank policy. Currently, AB 1247 - 6/18/13 -- Page 5 the program manager has to get DOF approval. Changes references in the California Disaster Assistance Act that allow the Governor to allocate funds from the Disaster Recovery Loan Loss Reserve Account from the old location in the Corporations Code to the new location under the I-Bank statutes in the Government Code, and makes other conforming changes. Consolidates reporting requirements. Adds intent language: o States that the Legislature finds that small business form the core of the California economy, and it is the interest of the state to increase opportunities for entrepreneurs, the self-employed, and microbusiness and small business owners. o Clarifies the Legislature's intent that the Small Business Finance Center include financial services as part of the resources it makes available, o Adds veteran businesses to the population served by the Center, o States that the Legislature intends to include federal, state, and local public resources, including private debt and equity investment as part of the resources it intends to provide, The bill would take effect immediately as an urgency statute. State Revenue Impact No estimate. Comments 1. Purpose of the bill . According to the author, "In 2011, California received approval from the U.S. Treasury to draw down up to $168 million in federal funds to assist California's small businesses. Approximately half of those moneys will be administered through the state's Small Business Loan Guarantee Program (SBLGP). Among other changes in the Governor's 2012 reorganization proposal, AB 1247 - 6/18/13 -- Page 6 both the SBLGP and the I-Bank are transferred from Business, Transportation and Housing Agency the Governor's Office of Business and Economic Development. AB 1247 makes the technical changes to effectuate these transfers, and in doing so, also modernizes the program structure to better serve small businesses and efficiently use the federal funding." 2. Shake it up . AB 1247 is a complex recasting of the statutory provisions of the small business loan assistance programs shifting from the Business, Transportation, and Housing Agency to I-Bank and GO-Biz under GRP#2. The measure removes some limits, such as removing loan caps and the limitation on direct loans only to farm borrowers, instead leaving these rules to the I-Bank Board; however, the bill does maintain caps on the overall risk of the program to safeguard its ability to repay defaults. As such, the measure makes the appropriate statutory changes without the potential for the state to assume excessive risk. 3. Incoming ! The Committee on Government Organization approved AB 1247 unanimously at its June 25, 2013 hearing. The Committee on Governance and Finance is hearing the measure as the committee of second referral. 4. Technical . Committee staff suggests the following amendment: On Page 5, line 14, and Page 19, line 25, insert the following, and renumber of the section: "Microbusiness lender" means a financial company as defined in 13997.2 in the Government Code. Assembly Actions Assembly Jobs, Economic Development & the Economy9 -0 Assembly Appropriations 17-0 Assembly Floor 70-0 AB 1247 - 6/18/13 -- Page 7 Support and Opposition (6/27/13) Support : Unknown. Opposition : Unknown.