BILL ANALYSIS Ó AB 2270 Page 1 ASSEMBLY THIRD READING AB 2270 (Bonta) As Amended May 27, 2016 2/3 vote ------------------------------------------------------------------ |Committee |Votes|Ayes |Noes | | | | | | | | | | | | | | | | |----------------+-----+----------------------+--------------------| |Jobs |9-0 |Eduardo Garcia, Kim, | | | | |Achadjian, Brough, | | | | |Brown, Chau, Chu, | | | | |Gipson, Irwin | | | | | | | |----------------+-----+----------------------+--------------------| |Appropriations |20-0 |Gonzalez, Bigelow, | | | | |Bloom, Bonilla, | | | | |Bonta, Calderon, | | | | |Chang, Daly, Eggman, | | | | |Gallagher, Eduardo | | | | |Garcia, Roger | | | | |Hernández, Holden, | | | | |Jones, Obernolte, | | | | |Quirk, Santiago, | | | | |Wagner, Weber, Wood | | | | | | | | | | | | ------------------------------------------------------------------ AB 2270 Page 2 SUMMARY: Modifies an existing statewide surety bond guarantee program for small contractors at the Small Business Finance Center, located within the California Infrastructure and Economic Development Bank (IBank). Specifically, this bill: 1)Expands and adds specificity to an existing small business contractor program, which offers surety bond guarantees to help businesses in obtaining surety bonds through the private market. 2)Specifically identifies disadvantaged business enterprises as an eligible applicant. Current law authorizes any small business contractor, including, but not limited to, women, minority, and disabled veteran businesses. 3)Authorizes the IBank to establish one or more pilot projects before adopting guidelines for a statewide program. 4)Authorizes the IBank to assign all or part of the program to another state entity, however, the IBank retains responsibility for reporting on the use and outcomes of the program. 5)Authorizes the IBank to establish new contractor relationships for the purpose of implementing this program, as specified. 6)Requires the existing surety bond guarantee program include technical assistance, as follows: a) Assessment and identification of the particular barriers facing the participating contractor and development of AB 2270 Page 3 solutions to those barriers, as specified. b) Identification of, and assistance in obtaining, other financial support and resources, as specified. EXISTING LAW: 1)Establishes the IBank within the Governor's Office of Business and Economic Development (GO-Biz) and authorizes it to undertake a variety of financial activities including, but not limited to, the administration of a revolving loan fund, oversight of the Small Business Finance Center, and the issuance of tax-exempt and taxable revenue bonds. The Small Business Finance Center is authorized to provide a range of financial products, including: a) Loan guarantees and other credit enhancements; b) Direct loans and other debt instruments; c) Disaster loan guarantees; and d) Surety bond guarantees. 2)Defines a small business, for the purpose of being eligible for state small business procurement contract bid preferences, as independently owned, not dominant in its field of operation, domiciled in California, employing 100 or fewer employees, and earning $10 million or less in average annual gross revenues for the three previous years. AB 2270 Page 4 3)Defines a DVBE, for the purpose of being eligible for state procurement, as an entity meeting all of the following requirements: a) The legal structure of the business is a: i) Sole proprietorship with at least 51% owned by one or more disabled veterans; ii) Publicly owned business with at least 51% of its stock unconditionally owned by one or more disabled veterans; iii) Subsidiary that is wholly owned by a parent corporation, but only if at least 51% of the voting stock of the parent corporation is unconditionally owned by one or more disabled veterans; or iv) Joint venture in which at least 51% of the joint venture's management, control, and earnings are held by one or more disabled veterans. b) A disabled veteran is a veteran of the military, naval, or air service of the U.S. who has a service-connected disability of at least 10% and who is domiciled in the state. c) The management and control of the daily business operations are by one or more disabled veterans. The disabled veterans who exercise management and control are not required to be the same disabled veterans as the owners of the business. d) It has a home office located in the United States, which is not a branch or subsidiary of a foreign corporation, AB 2270 Page 5 foreign firm, or other foreign-based business. FISCAL EFFECT: According to the Assembly Appropriations Committee, implementation of the bill will result in: 1) Ongoing General Fund costs of approximately $1.1 million. These costs represent $150,000 for one staff loan officer at the IBank and $861,000 for the IBank to contract with the Financial Development Corporations to administer the program and provide statewide technical assistance. 2) The analysis also states that there will be a need for a one-time General Fund appropriation of at least $10 million in order to guarantee the surety bonds. COMMENTS: Small businesses play an essential role within the California economy, contributing the most net new jobs, offering an alternative to un- and underemployment, and helping to disburse the financial advantages of the state's globally connected economy. State procurement opportunities represent an important economic tool to support small business development. In the last 15 report periods, the state has met the 25% small business procurement participation goal only five times including the 2013-14 fiscal year. This measure proposes the establishment of a contractor development program to assist businesses in accessing surety bonds. With enhanced technical assistance, and the option of utilizing a surety bond guarantee, small businesses, DVBEs, and disadvantaged businesses should be able to more successfully compete for state infrastructure-related contracts. The Assembly version of the 2016-17 Budget includes funding for the capitalization of this program. Removing Contracting Impediments: Small and emerging contractors face a variety of challenges in participating in state procurement opportunities. This bill addresses one of AB 2270 Page 6 small businesses' key challenges, that of being able to obtain a surety bond; a basic requirement for construction-related contracts with public entities. The Miller Act, under federal law, and the Little Miller Act, under state law, requires contractors on most public works construction projects to post bonds guaranteeing both the performance of their contractual duties and the payment of their subcontractors, workers, and material suppliers. These types of bonds serve as a safeguard to the public entity by ensuring compensation and/or the completion of a project. In some cases, the surety company is obligated to find another contractor to complete the contract or compensate the project owner for the financial loss incurred. Structurally, the surety bond is a three party agreement between the contractor, who is mandated to provide the bond; the project owner, the party protected by the bond; and the surety-insurance company, who writes the bond. There are a variety of surety bonds, but each type shares a common purpose of guaranteeing a contractual obligation to the project owner. For example, a performance bond will guarantee an obligation is met in accordance with the plans and specifications, while a supply bond guarantees that ordered materials will be delivered as agreed upon. Overall, surety bonds can be instrumental in limiting the risk of selecting a bidder; namely the risk of the project not being completed or that a contractor's unpaid creditors might place a lien on the project. Reducing these risks ultimately aids the owner in reducing the cost of borrowing money to finance the project. Implementation of this bill would assist emerging contractors by providing an early assessment of the firm's strengths and weaknesses. Based on the assessment, a technical assistance provider would work with the contractor to address deficiencies and then assist the contractor in negotiating the terms of the AB 2270 Page 7 surety bonds. In some cases, a surety guarantee could be used to enhance the position of the business before the surety bond issuer. By providing technical assistance and collateral support for small construction businesses, the proposed program would positively benefit the contractor, as well as the project owner, the prime contractor, and prospective workers. Over the next five years, the author contends that the state will initiate over $50 billion in construction projects related to transportation and community services including health care, education, courts, and recreation. These construction projects represent excellent business opportunities for small businesses, Disabled Veteran Business Enterprises, and disadvantaged businesses. However, without assistance in obtaining surety bonds, many of these opportunities could go unexplored. Analysis Prepared by: Toni Symonds / J., E.D., & E. / (916) 319-2090 FN: 0003192