BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |AB 2728 |Hearing |6/29/16 |
| | |Date: | |
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|Author: |Atkins |Tax Levy: |No |
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|Version: |4/25/16 |Fiscal: |Yes |
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|Consultant|Grinnell |
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Insurance: community development investments
Extends the Community Development Financial Institution Credit
until the 2021 taxable year; makes other changes to the credit
and other programs relating to insurance company investment.
Background
Tax Credit. Federal law allows a new markets tax credit for
taxpayers' qualified equity investments in community development
entities, the primary mission of which must be serving or
providing investment capital for low-income communities or
low-income persons, as certified by the Secretary of the
Treasury. The federal credit is equal to 39% of the qualified
equity investment and is spread over seven years. State law
does not conform to the federal new markets credit, but instead
allows the Community Development Financial Institution credit
(CDFI), administered by the Department of Insurance (CDI) (AB
1520, Vincent, 1997).
Taxpayers may claim a credit against the Gross Premiums Tax,
Personal Income Tax, or Corporation Tax equal to 20% of
qualified investments in the form of non-interest bearing
deposits, loans, or equity investments of at least $50,000 held
for at least 60 months. Taxpayers can carry over the credit for
four years. The credit was initially used only to reduce
Personal Income Tax, or Corporation Tax liabilities, but the
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Legislature added a credit against the Gross Premiums Tax in
1999, also administered by CDI (AB 157, Vincent). In 2002, the
Legislature extended the credit until 2007 (SB 409, Vincent),
again until 2012 (AB 2831, Ridley-Thomas, 2006), and finally
until 2017, but only allowed CDI to certify new deposits for
credits until January 1, 2015 (AB 624, J. Pérez, 2011). The
Legislature then allowed CDI to certify new deposits until
January 1, 2017, while increasing from $10 million to $50
million each year the amount of investments that generate CDFI
credits (AB 32, J. Pérez, 2013).
For deposits to generate credits, the CDFI must be certified by
the California Organized Investment Network (COIN), an office in
CDI, by demonstrating that it is a private financial institution
located in California, its primary mission is community
development, and that it lends in urban, rural or
reservation-based communities in California. CDFIs may be
banks, credit unions, or non-regulated non-profit institutions
organized to provide private capital for community development
or investing. There are currently 48 CDFIs in California.
CDFIs must use the proceeds of the investment for a purpose that
is consistent with its community development mission and for the
benefit of economically disadvantaged communities and low-income
people in California.
CDFIs must apply to COIN on behalf of the taxpayer. If the
investment is approved, COIN certifies the amount of the
investment and the credit, which is capped at a total of $50
million each year, plus any unused amount from past years. COIN
generally allocates the credits on a first-come, first-served
basis; however, if COIN determines that the total amount of
investment will exceed the cap, it can prioritize applications
with investments that directly benefit low-income persons, or
prioritize rental housing, mortgages for community-based
residential housing, and self-help housing ahead of
single-family housing. CDI or the Franchise Tax Board (FTB) may
recapture the credit within the 60 month period if the taxpayer
withdraws or reduces the amount of the investment below $50,000.
COIN generally allocates credits twice per year. In recent
years, requests for credits exceeded the amount they are
authorized to allocate. In December, 2015, COIN certified CDFI
credits for:
AB 2728 (Atkins) 4/25/16 Page 3
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CSAA Insurance Group for its $353,235 investment into
Enterprise Community Investment for the California Hotel
project in Oakland that provides for the rehabilitation of
137 units of affordable rental housing, including 119
efficiencies, 34 units for special needs households, and 15
units for homeless persons with mental illness.
MetLife Insurance Company for its $3 million investment
into Genesis LA Economic Growth Corp that will promote safe
and healthy communities in underserved areas of Los Angeles
County through a learning center that provides summer camps
and school enrichment programs, workforce development
programs, and funding for a homeless servicing agency.
United HealthCare for its $3 million investment into
Enterprise Community Loan Fund to support and leverage
financing for the development and preservation of
affordable housing and Federally Qualified Health Centers
for low-income families across the State.
MetLife Insurance Company for its $687,162 investment
into Enterprise Community Investment that will leverage
additional capital to rehabilitate Gabilan Plaza
apartments, an affordable housing project for low to
moderate-income families in Salinas. The rehabilitation
will include adding photovoltaic panels and converting ten
units for handicap accessibility
Data call. Insurers that write more than $100 million in
California premium must report to COIN by July 1, 2016 of
various categories of investments over the last three years,
including community development and green investments, referred
to as a "data call." CDI must report aggregate data relating to
specific insurer investments, high-impact investments, and COIN
actions to analyze data by December 31, 2016. These
requirements expire on January 1, 2020.
AB 624 also created the COIN Advisory Board to advise COIN or
its successor on the best methods of increasing the level of
insurance industry capital in safe and sound investments while
providing fair returns to investors and social benefits to
underserved communities. The advisory board is composed of the
Insurance Commissioner or his or her designee, and at least one
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voluntary member from:
An insurance company executive
A licensed attorney practicing law
A member of the public appointed by the Speaker of the
Assembly
A member of the public appointed by the Senate Committee
on Rules
A consumer advocacy group
A local economic development practitioner
A financial institution or community development
financial institution
Members serve two year terms, staggered by drawing lots at the
board's first meeting so that a simple majority serves two-year
terms, with the remaining members serving one year terms. The
board is required to meet quarterly, or as directed by the
Commissioner, and can be reimbursed for actual expenses.
Similar to the tax credits, state law authorizing the board is
due to expire on January 1, 2017.
Proposed Law
Assembly Bill 2728 extends the CDFI credit in the Personal
Income Tax, Corporation Tax, and Gross Premiums Tax until the
2021 taxable year. The bill also makes the following changes:
Adds investments in reservation-based communities and
rural area investments onto the list of community
development investments for purposes of meeting "data call"
reporting requirements,
Extends the COIN board's authorization until January 1,
2022,
Requires priority be given to insurance company
investors over all others for purposes of allocating the
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CDFI credit, and
Provides that investment reductions of less than $50,000
trigger a clawback of the total amount of the credit.
State Revenue Impact
According to Franchise Tax Board, AB 2728 results in revenue
losses of $600,000 in 2016-17, $1.9 million in 2017-18, and $3.2
million in 2019-20. However, this estimate does not consider
the measure's impact on Gross Premiums taxpayers which are
approximately 53% of the credit generated.
Comments
1. Purpose of the bill . According to the author, "According to
the author, COIN is a collaborative effort between CDI, the
insurance industry, community affordable housing and economic
development organizations, and community advocates. COIN was
established in 1996 at the request of the insurance industry as
an alternative to state legislation that would have required
insurance companies to invest in underserved communities,
similar to the federal Community Reinvestment Act that applies
to the banking industry. This voluntary program facilitates
insurance industry investments that benefit California's
environment and its LMI and rural communities. The program
serves as a liaison between insurers that are seeking investment
opportunities and the community organizations that are seeking
investment capital for projects. Each year, CDI may award up to
$10 million in tax credits annually to leverage up to $50
million in community development investments. Under the program,
investors receive a tax credit worth up to 20% of their
investment in one of the COIN Certified CDFIs and can apply the
credit to the state personal income tax, corporation tax or
insurer premium tax. CDFIs are mission-driven community
organizations, separate from government control, dedicated to
providing financial products and services to low-income
communities underserved by traditional financial markets. All
CDFIs that are eligible to participate in the COIN CDFI Tax
Credit Program must be certified by COIN. The COIN tax credit
currently sunsets on January 1, 2017. If the COIN tax credit is
not extended, low and moderate income communities in California
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will lose the support of an effective program that incentivizes
critical investments in their communities."
2. Policy Questions . Taxpayers claiming the CDFI include some
of the world's largest financial institutions and insurance
companies, including Charles Schwab, JP Morgan Chase, and
MetLife. These firms are highly sophisticated investors,
allocating billions of dollars to various asset classes. The
credit AB 2728 extends serves to subsidize these firms'
investment in CDFIs with the intent that capital will flow to
productive uses in low-income communities in California, with
the credit percentage intended to compensate them for the
additional risk of depositing funds in a CDFI instead of safer
investments with lower returns. As such, this credit poses
significant policy question, such as whether it is appropriate
for state government to use tax credits to subsidize private
investment, and if so, are CDFIs the right thing to subsidize?
Additionally, because tax credits are funded by forgoing revenue
that could be used for other government services, is extending
the CDFI credit worth its cost?
3. Performance ? The Legislature first enacted the CDFI credit
in 1999, extended it three times, and increased the investment
amounts that generate credits fivefold in 2013, for a total of
$10 million in credits annually. However, it's unclear whether
the revenue foregone by allowing tax credits for firms to hold
deposits in CDFIs performs better than direct public investments
in low-income communities, such as affordable housing,
transportation, and other public works. The CDFI credit may
also overlap with other programs subject to significantly more
oversight, such as the Low-Income Housing Tax Credit. However,
COIN argues that the credit allows COIN certified CDFIs to
access otherwise inaccessible capital and fund investments that
the CDFIs would not have been able to fund had they received a
traditional loan. COIN adds that the COIN CDFI Tax Credit is
unique because, unlike traditional CDFI loans, it gives COIN
certified CDFIs access to insurer capital, access to zero
interest capital, and full use and control of the investment
with the condition that loans be made in accordance with the
CDFI's mission. COIN adds that
Insurers do not typically invest in CDFIs; however,
through the COIN CDFI Tax Credit Program insurers, like
MetLife, have made more than $10 million in qualified
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investments annually into COIN certified CDFIs. In 2015,
COIN awarded MetLife Insurance Company $600,000 in tax
credits for their $3 million investment to Genesis LA, a
COIN certified CDFI. Genesis LA used this investment to
make a $1.35 million loan to MERCI, a nonprofit
organization that provides direct services to adults with
severe developmental disabilities living in East Los
Angeles and the San Gabriel Valley. Genesis LA's loan
helped MERCI finance an expansion that will allow them to
serve 120 new clients and create approximately 29 new jobs.
The loan from Genesis LA leveraged another $4.8 million to
finance the project. Genesis LA and MetLife were introduced
through the COIN Program, and MERCI is an example of an
investment that would not have been possible without the
investment terms required by the COIN Program
Many investments funded by COIN certified CDFIs,
especially those in rural areas, would not be possible but
for the requirement that investments qualified through the
COIN CDFI Tax Credit program be either zero interest
loans/deposits, equity investment or equity-like debt
instruments that allow the CDFI full use and control of the
investment for the 60 month term. One example of such an
investment is the Local Initiatives Support Corporation's
(LISC) investment into Self-Help Enterprises (SHE) to
finance well replacement costs for rural residents of the
Central Valley. Well replacement costs range from $20,000
to $35,000 depending on location, soil conditions and
availability of drillers. Conventional lending agencies
cannot provide home equity lines of credit to homeowners
while personal loan limits do not provide enough funding to
cover the total cost and have interest rates and terms that
are unfavorable to those already struggling to make ends
meet. Traditional interest bearing CDFI loans would have
prevented LISC and SHE from conducting this necessary
program; however the COIN qualified zero interest loan
removed these financing barriers.
The Committee may wish to consider the return on the state's
current level of investment in the CDFI program, and whether
superior alternatives exist to support investment in California
communities with high levels of unemployment and poverty.
4. Alternatives . The CDFI credit serves as a carrot, not a
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stick, by subsidizing investments made by banks and insurance
companies. Instead, the Legislature could instead enact
requirements similar to federal law's Community Reinvestment Act
(CRA), which provides considerable regulatory encouragement for
federally-regulated banks to invest in low-income areas.
California could adopt its own CRA to require banks and
insurance companies to invest in specified areas as a condition
of doing business in the state
5. LAO's take . AB 2831 (Ridley-Thomas) required the LAO to
prepare an analysis of the CDFI credit. LAO's April 14, 2011
letter to the Chair of the relevant committees in the Assembly
and Senate included four conclusions, among them:
Economic Impact. It is very difficult to estimate the
impact of the tax credits, although we suspect that in many
cases investments in the CDFIs would not have been made in
the credit's absence. It is true that some of the credits
have benefited larger CDFIs that are capable of raising
funds in other ways and for which the credit-funded
investments represent a smaller portion of their total
assets. Even in these cases it seems likely that the tax
credits helped generate investment activity that otherwise
might not have been funded.
Credit Percentage Seems Reasonable. This credit is set
up like most investment credits in that it refunds a
percentage of the invested amount, and 20 percent is the
equivalent of about 2.5 to 3 percentage points on a
ten-year loan at prevailing interest rates. This is about
one-half of the interest rate spread between a fairly safe
investment and a very risky one. For example, recently,
the difference between the rates on a BBB (low
investment-grade) bond and a CCC ("junk") bond was about 6
percent. While we have no reason to believe that a 20
percent subsidy is too high or too low, it is possible that
changing conditions in financial markets in the future
could warrant a different subsidy percentage for this
credit.
Owned Versus Rental Housing. The CDFIs have supported
both rental and owner-occupied housing, including both
construction and mortgage loans. Credit standards for home
purchase loans have increased markedly since the collapse
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of the housing market. In order to benefit lower-income
individuals, it may make sense for housing development
efforts to focus more on rental housing at least in the
near future. Accordingly, the Legislature may wish to
consider focusing the tax credit more on CDFI investments
in rental housing opportunities to benefit low-income
populations. (In response to this point, AB 624 allowed
CDI to prioritize rental housing and other use over
single-family homes if total investments exceed the legal
cap.)
First-Come, First-Served Tax Credits Can Be Problematic.
In some prior years, the program has hit its annual cap.
If the credit is retained in its current form, it may be
advisable to authorize COIN or some other entity to award
the credits competitively instead of on a first-come,
first-served basis. This might allow the state to
prioritize CDFI investments that best fit desired policy
objectives-for example, by directly benefiting lower-income
people instead of benefiting projects that merely are
located in lower-income areas
5. MCO . Recently, when enacting the new Managed Care
Organization (MCO) Provider Tax, the Legislature reduced the
gross premiums tax rate from 2.35% to 0% for specified premiums
received on or after July 1, 2016, and on or before June 30,
2019 (SBx2 2, Hernández, 2016). The application of this
temporary 0% rate is limited to premiums received by an insurer
that provides health insurance and has a corporate affiliate,
which is either a "health care service plan" or "health plan,"
contracted with the State Department of Health Care Services to
provide Medi-Cal services. As such, health insurers may not
have much demand for the CDFI tax credit in the next three
years, as it cannot be applied to reduce its MCO tax obligation.
6. What about us ? The Small Business Investors Alliance
requested amendments to AB 2728 to allow equity investments in
"Small Business Investment Companies," to qualify investors for
CDFI credits. The Alliance argues that its ownership model,
which relies on a combination of private investment and proceeds
of bonds issued by the United States Small Business Association,
and investment expertise can provide superior returns to the
current CDFI credit.
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7. Bored of boards . AB 2728 extends the statutory
authorization of the COIN Advisory Board until January 1, 2022.
However, the Insurance Commissioner can create and convene any
advisory board that he sees fit without explicit direction from
state law, and nothing in its current law grants it any formal
regulatory powers. The Committee may wish to consider whether
extending the COIN Advisory Board's existence in statute is
necessary.
8. Incoming ! The Senate Committee on Insurance approved AB
2728 on an 8 to 0 vote on June 22nd. The Committee on
Governance and Finance is hearing the bill as the committee of
second reference.
Assembly Actions
Assembly Revenue and Taxation 9-0
Assembly Insurance 13-0
Assembly Appropriations 20-0
Assembly Floor 80-0
Support and
Opposition (6/23/16)
Support : Insurance Commissioner Dave Jones; 3 Core; Advocation,
Inc.; Burbank Housing Development Corporation; Cal Coastal: A
Small Business Leader; California Apartment Association;
California Department of Insurance; Century Housing; Clearing
House Community Development Financial Institution; DCA Capitol
Partners; Enterprise Community Investment; First General Bank;
Fresno Community Development Financial Institution; Fresno
Economic Opportunities Commissio;; Genesis LA Economic Growth
Corporation; Housing Trust Silicon Valley; LISC; Mercy Housing;
Neighbor Works Home Ownership Center; Neighbor Works Home
Ownership Center Sacramento Region; Neighbor Works Orange
County; Neighborhood Housing Services of the Inland Empire;
Pacific Community Ventures; Personal Insurance Federation of
California; Redwood Valley Little River Band of Promo Indians;
Roxborugh Pomerance Nye and Adreani; Rural Community Assistance
Corporation; San Luis Obispo County Housing Trust Fund; Small
Business Finance-CDC; Star Mountain Capita, LLC; Tri Counties
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Bank; United Native Housing Development Corporation; VEDC;
Ventura County Community Development Coroperation; WNC and
Associates.
Opposition : Unknown.
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