BILL ANALYSIS Ó
SENATE COMMITTEE ON
BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT
Senator Jerry Hill, Chair
2015 - 2016 Regular
Bill No: AB 2270 Hearing Date: June 27,
2016
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|Author: |Bonta |
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|Version: |May 27, 2016 |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant|Nicole Billington |
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Subject: California Infrastructure and Economic Development
Bank: surety bond program
SUMMARY: Modifies an existing statewide surety bond guarantee program
for small business contractors within the California
Infrastructure and Economic Development Bank (I-Bank).
Existing law:
1)Establishes the Governor's Office of Business and Economic
Development (GO-Biz) to serve as the lead state entity for
economic strategy and marketing of California on issues
relating to business development, private sector investment,
and economic growth. (Government Code (GC) §§ 12096 -
12098.5)
2)Establishes, by the Small Business Financial Assistance Act of
2013, the California Small Business Finance Center within
I-Bank to assist businesses seeking capital resources not
otherwise available in the private market including: (GC §§
63088 - 63089.98)
a) Loan guarantees and other credit enhancements;
b) Direct loans and other debt instruments;
c) Disaster loan guarantees; and
AB 2270 (Bonta) Page 2
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d) Surety bond guarantees.
This bill:
1)Expands and adds specificity to an existing small business
contractor program (Program), which offers surety bond
guarantees to help businesses in obtaining surety bonds
through the private market.
2)Specifically identifies disadvantaged business enterprises as
eligible applicants for the Program. Current law authorizes
any small business contractor, including, but not limited to,
women, minority, and disabled veteran businesses as eligible
applicants.
3)Authorizes I-Bank to assign all or part of the Program to
another state entity, but requires I-Bank to retain
responsibility for reporting on the use and outcomes of the
Program.
4)Authorizes I-Bank to establish one or more pilot projects
before adopting guidelines for a statewide Program.
5)Authorizes I-Bank to establish new contractor relationships
for the purpose of implementing the Program, as specified.
6)Requires that the Program include technical assistance, as
follows:
a) Assessment and identification of the particular barriers
facing the participating contractor and development of
solutions to those barriers, as specified.
b) Identification of, and assistance in obtaining, other
financial support and resources, as specified.
FISCAL
EFFECT: According to an Assembly Appropriations Committee
analysis dated April 27, 2016, this bill would result in an
ongoing General Fund cost of approximately $1.1 million. These
costs represent $150,000 for one staff loan officer at I-Bank
and $861,000 for I-Bank to contract with the Financial
Development Corporations to administer the program and provide
AB 2270 (Bonta) Page 3
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statewide technical assistance. Also, this bill would result in
a one-time General Fund appropriation of at least $10 million in
order to guarantee the surety bonds.
COMMENTS:
1.Purpose. The Author is the Sponsor of this bill. According
to the Author, "Because of a variety of factors, bonding is
difficult for small contractors to obtain and a large segment
of the State's construction companies are unable to bid on
state convened work and thus engage in profitable public
sector work. Surety bond underwriters assess a wide range of
factors that most small and minority contractors struggle
with-the pipeline of work, experience, access to capital,
organization, and structure, to name a few. Inability to
obtain bonding means that many small contractors are unable to
access the large pool of state construction currently underway
and planned for the future. Contractors cannot even submit
bids as prime contractors for projects over $100,000 (less in
some cases) without a bond, and neither public agencies nor
prime contractors are willing to risk contracting with
unfamiliar, unbondable contractors.
"Due to lack of funding, I-Bank has been unable to activate a
surety bond guarantee program for small businesses. This bill
would activate and add specificity to the existing program.
In addition to providing financial support to qualifying small
businesses, AB 2270 would provide technical support to help
them navigate the labyrinthine state procurement process.
Establishment of a statewide bonding assistance program would
enable small and diverse businesses the opportunity to work on
projects such as High Speed Rail, water and highway
infrastructure, and other development within the state.
"It has been demonstrated that with appropriate support, small
contractors can be competitive, expanding bidding pools
(lowering project costs), hiring local workers and
successfully completing public construction work that
contributes significantly to the local and state economy. A
Sacramento State University study found that doing business
with small state companies generated more in net new revenue
growth and net new jobs than larger businesses."
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2.Small Business Role in California's Economy. California's
dominance in many economic areas is based, in part, on the
significant role small businesses play in the State's $2.2
trillion economy. According to a 2015 U.S. Small Business
Administration report, California's small businesses employed
half of the state's private workforce in 2012 (6.5 million
employees). According to the U.S. Census Bureau, small
businesses made up 99.2 percent of all employers in the state
for the same year.
In difficult economic times, smaller-sized businesses often
function as economic engines. The trend continued in the
recession with the number of non-employer firms increasing
from 2.6 million firms with $137 billion in revenues in 2008
to 2.8 million firms with $138 billion in revenues in 2010.
In the post-recession economy, small businesses are expected
to become increasingly important due to their ability to be
more flexible and better suited to meet niche market needs.
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
throughout the California economy. Their small size, however,
results in certain challenges in meeting regulatory
requirements, accessing capital, and marketing their goods and
services. Due to the benefits small businesses provide the
California economy, the State has historically attempted to
mitigate these challenges with government assistance.
California's network of technical assistance providers assist
businesses with a range of services, including access to
quality training, one-on-one counseling, mentoring, marketing
data, and other business development resources.
3.Contracting Impediments for Small Businesses. This bill
addresses one of small businesses' key challenges in
participating in State procurement opportunities: obtaining a
surety bond. Obtaining a surety bond is a basic requirement
for construction related contracts with public entities. The
Miller Act under federal law and the Little Miller Act under
state law require 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.
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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: 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. Overall, surety bonds can be
instrumental in limiting the risk of selecting a bidder.
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 surety bonds. In some cases, a surety guarantee
could be used to enhance the position of the business before
the surety bond issuer.
4.GO-Biz and Current Small Business Assistance. In April 2010,
Governor Schwarzenegger issued Executive Order S-05-10 as a
means to create the Governor's Office of Economic Development
(GOED). In October 2011, the Governor signed AB 29 (John A.
Pérez, Chapter 475, Statutes of 2011), which effectively
codified GOED and changed its name to GO-Biz. Since its
inception, the office has served thousands of businesses, 95
percent of which are small. The most frequent types of
assistance include help with permit streamlining, starting a
business, relocation and expansion of businesses, and
regulatory challenges.
In March 2012, Governor Brown initiated a reorganization
process to realign the State's administrative structure. Key
changes included dismantling of the Business, Transportation
and Housing Agency (BTH) and the shifting of a number of key
programs to GO-Biz including the Small Business Loan Guarantee
Program (SBLGP), the California Travel and Tourism Commission,
the California Film Commission, the Film California First
Program, and I-Bank. As part of this restructuring, AB 1247
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(Medina, Chapter 537, Statutes of 2013) placed the Program's
authority, the SBLGP, and other programmatic authority under
I-Bank within GO-Biz. The California Small Business Finance
Center is the governmental unit within I-Bank with the
administrative responsibility for small business loan and
small business bond guarantees.
While the SBLGP is currently operative, the small business
surety bond guarantee program has not been sufficiently funded
since it was placed under I-Bank and is therefore inoperative.
5.Federal Surety Guarantee. The United States Small Business
Administration (SBA) offers a surety bond guarantee program
for small and emerging contractors that cannot otherwise
obtain surety bonds through regular commercial channels. The
SBA guarantee covers contracts up to $2 million. A contractor
applying for an SBA surety guarantee must qualify as a small
business, in addition to meeting specific eligibility criteria
for surety bonding.
6.Prior Related Legislation. AB 1247 (Medina, Chapter 537,
Statutes of 2013) enacted the Small Business Financial
Assistance Act, transferred the administration of the small
business financial development corporation managed programs
from the BTH to I-Bank within GO-Biz, and clarified a number
of programmatic elements to improve program delivery.
AB 2523 (Hueso) of 2012 would have authorized I-Bank to enter
into participation and syndication loan agreements with
financial institutions for the purpose of expanding capital
opportunities for small businesses. ( Status : This bill was
held in Senate Appropriations Committee.)
AB 2619 (Pérez) of 2012 would have established the Start-Up
California Impact Investment Venture Fund Program,
administered through I-Bank, for the purpose of providing
equity investments to start-ups and small businesses.
( Status : This bill was held in Assembly Appropriations
Committee.)
AB 29 (Pérez, Chapter 475, Statutes of 2011) established
GO-Biz within the Governor's Office to serve as the lead
entity for economic strategy and marketing of California on
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issues relating to business development, private sector
investment, and economic growth.
AB 2376 (Price, Chapter 458, Statutes of 2008) authorized the
establishment of the Small and Emerging Contractors Technical
Assistance Program, administered by the California Department
of Transportation, for the purpose of providing small and
emerging contractors with the technical assistance necessary
to obtain surety bond guarantees offered by the SBA. The
program was repealed on January 1, 2013.
AB 1695 (Bass) of 2007 would have activated the Surety Bond
Guarantee Account, administered by the Small Business Loan
Guarantee Program, for the purpose of providing surety bond
guarantees for small businesses that provide services on state
and federally funded transportation projects. ( Status : This
bill was held under submission in the Assembly Committee on
Appropriations.)
7.Arguments in Support. Supporters of the bill cite that this
measure would enable small and diverse businesses the
opportunity to work on projects such as High Speed Rail, water
and highway infrastructure, and other development within the
State. They note that, with appropriate support, small
contractors can be competitive. When given the opportunity,
small contractors expand bidding pools (lowering project costs
overall), hire local workers, and successfully complete
construction work that contributes to the economy.
SUPPORT AND OPPOSITION:
Support:
All Bay Area Glass
Asian American Contractors Association
Association of Financial Development Corporations
Bayfish Creative Management
CFR & Associates
FCI Management
Fresno Metro Black Chamber of Commerce
Greater Los Angeles African American Chamber of Commerce
GSF Enterprises, Inc.
Mantis Builders
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Max Out, Inc.
National Association of Minority Contractors of Southern
California
Net Electric
POMS and Associates Insurance Brokers, LLC
RMA Contractors and Consultants, Inc.
San Diego General Contracting
SCORE Greater Los Angeles
Servitek Solutions
Value Fire Protection, Inc.
William Osgood, President the Los Angeles Chapter of the
Disabled Veterans Alliance
Opposition:
None on file as of June 21, 2016.
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