BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 2270


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          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   |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |
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                                                                    AB 2270


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          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  








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               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. 








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          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,  








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               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  








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          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  








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          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