BILL ANALYSIS Ó
SENATE COMMITTEE ON
BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT
Senator Jerry Hill, Chair
2015 - 2016 Regular
Bill No: SB 936 Hearing Date: April 11,
2016
-----------------------------------------------------------------
|Author: |Hertzberg |
|----------+------------------------------------------------------|
|Version: |April 4, 2016 |
-----------------------------------------------------------------
----------------------------------------------------------------
|Urgency: |No |Fiscal: |Yes |
----------------------------------------------------------------
-----------------------------------------------------------------
|Consultant|Nicole Billington |
|: | |
-----------------------------------------------------------------
Subject: California Small Business Expansion Fund: corporate
guarantees
SUMMARY: Reduces the required reserve leverage ratio of the
California Small Business Expansion Fund, which funds the
California Small Business Loan Guarantee Program, from 20
percent to 10 percent.
Existing law:
1)Establishes the Governor's Office of Business and Economic
Development (GO-Biz), which is administered by a director
appointed by the Governor for the purpose of serving 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 Expansion Fund (Fund);
authorizes the approval of certain small business financial
development corporations (FDCs) to act as intermediaries
between the state, small business, and financial institution
in administering loan guarantees; requires the loan guarantees
made under the Fund to be backed by money on deposit or by
receivables due from funds loaned from the expansion fund.
(GC §§ 63088 - 63089.98)
SB 936 (Hertzberg) Page 2
of ?
3)Specifies the reserve leverage ratio of the California Small
Business Expansion Fund at 20 percent and will increase that
ratio to 25 percent on January 1, 2018. (GC §§ 63089.5 -
63089.62)
This bill:
1)Reduces the reserve leverage ratio required to back loan
guarantees made under the California Small Business Expansion
Fund, which funds the Small Business Loan Guarantee Program
(SBLGP), to 10 percent.
2)Updates several references to the Small Business Expansion
Fund reserve leverage ratio and makes other technical
conforming code changes.
FISCAL EFFECT: Unknown. This bill is keyed "fiscal" by
Legislative Counsel.
COMMENTS:
1.Purpose. The Sponsor of this measure is the Governor's Office
of Business and Economic Development (GO-Biz) . According to
the Author, nearly one-third of small business owners are
unable to obtain adequate financing for their companies. The
California Small Business Loan Guarantee Program (SBLGP)
provides guarantees to commercial lenders for loans issued to
business owners that otherwise would not qualify, such as low-
to moderate-income individuals. Current law requires 20
percent of each dollar of a loan guarantee to be set aside in
the reserve; that requirement will increase to 25 percent in
2018 - well above the 10 percent minimum required by federal
law. The current reserve requirement means fewer loans can be
supported and will needlessly tie up valuable lending support
capacity at I-Bank. While the reserve account protects
lenders against losses, the program has a promising track
record. Since 2011, losses on the federal funds amounted to
less than one percent of the reserve account. SB 936
decreases the required reserve needed to back loan guarantees
made by the SGLGP to 10 percent.
2.Small Business within the California Economy. California's
SB 936 (Hertzberg) Page 3
of ?
dominance in many economic areas is based, in part, on the
significant role small businesses play in the state's $2.2
trillion economy. 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. According
to a 2015 U.S. Small Business Administration report,
California has more than 3.6 million small businesses, over
1.2 million more than any other state. The report also noted
that 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.
Their small size, however, results in certain challenges in
meeting regulatory requirements, accessing capital, and
marketing their goods and services. 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.Governor's Office of Business and Economic Development
(GO-Biz). In February 2010, the Little Hoover Commission
undertook a review of the state's economic and workforce
development programs. In its final report, Making up for Lost
Ground: Creating a Governor's Office of Economic Development,
it analyzed the status and effectiveness of current programs
since the 2003 demise of the Technology, Trade, and Commerce
Agency (TTCA) and recommended the creation of a new
governmental entity to fill the void left by the dismantled
agency. The report called for a single entity that would
promote greater economic development, foster job creation,
serve as a policy advisor, and deliver specific services
directly to the California business community. In April
2010, Governor Schwarzenegger issued Executive Order S-05-10
as a means to operationalize the report recommendations
including the creation of 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
SB 936 (Hertzberg) Page 4
of ?
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 include 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 the Infrastructure and Economic Development Bank
(I-Bank). As part of this restructuring, AB 1247 (Medina,
Chapter 537, Statutes of 2013) placed the SBLGP under I-Bank
within GO-Biz.
The California Small Business Finance Center is the
governmental unit within I-Bank with the administrative
responsibility for the SBLGP. In May 2015, the directives for
the implementation of programs administered under the Small
Business Finance Center were adopted by the I-Bank Board
pursuant to the Small Business Financial Assistance Act of
2013 (Medina, Chapter 537, Statutes of 2013). The directives
and requirements replaced all existing regulations regarding
the SBLGP under the Small Business Finance Center pursuant to
the law. Additionally, in the 2014-15 fiscal year, I-Bank
hired a Chief Compliance Officer to assist with all I-Bank
program compliance, including state and federal rules and
guidelines governing the SBLGP program.
4.Small Business Loan Guarantee Program. According to the
California Small Business Loan Guarantee Program 2014-2015
Annual Report, the SBLGP promotes statewide economic
development by providing collection guarantees to financial
institutions for loans issued to small businesses that
otherwise would not qualify for a term loan or line of credit.
As a result of the SBLGP, participating small businesses are
able to secure financing that allows growth and expansion of
their business. The loan guarantee serves as a credit
enhancement and an incentive for financial institutions to
make loans to small businesses that otherwise would not be
eligible for such financing.
Business size eligibility for the SBLGP generally follows the
U.S. Small Business Administration 7(a) program guidelines,
SB 936 (Hertzberg) Page 5
of ?
which vary based on industry. Specific market rate loan terms
and interest rates are 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 SBLGP provides guarantees covering
up to 80 percent of the loan, but not exceeding $2,500,000.
In addition to assisting small businesses in obtaining an
initial loan, the SBLGP in turn also helps small businesses
establish credit with a lender, which makes additional future
financing without assistance more likely.
The State of California was approved for an allocation of $168
million in federal funds from the U.S. Treasury under the
State Small Business Credit Initiative (SSBCI), a component of
President Obama's Small Business Jobs Act of 2010. The
allocation was split between two state agencies, with the
SBLGP under I-Bank to receive half or $84 million in three
disbursements. The SSBCI funds have unique requirements.
Consequently, the SSBCI-funded loan guarantees are
administered separately as a subset of the SBLGP. Thus, since
2011, the SBLGP has consisted of two subsets: the state-funded
portion of the SBLGP program and the federal SSBCI-funded
portion.
Historically, eleven Financial Development Corporations (FDCs)
had contracts with the State to administer guarantees under
the state and federal loan guarantee programs. Each FDC is a
nonprofit corporation with general responsibilities for:
marketing SSBCI and SBLGP, underwriting the loan guarantees,
coordinating the loan guarantee documents and/or loan
packages, executing and issuing the loan guarantees, and
ensuring that lenders follow the required default procedures
before requesting payment on defaulted loans. After assessing
the effectiveness of the services provided by each FDC, I-Bank
offered contracts to nine of the FDCs for
FY 2014-15.
In FY 2014-15 alone, a total of 252 SSBCI loans were granted
resulting in $92.8 million of loan guarantees that supported
$130.1 million in small business loans. This guarantee
activity contributed to a total of $211,617,415 of overall
capital that was injected into California's small business
community. In addition, the borrowers reported 11,781 jobs
were created or retained during this period as a result of
SB 936 (Hertzberg) Page 6
of ?
these loan guarantees. For the federally-funded SSBCI loans,
I-Bank paid claims amounting to $40,383 during the FY 2014-15,
equivalent to 0.08 percent of the reserve account and 0.02
percent of the over $210 million outstanding principal.
During FY 2014-15, the state-funded program was limited to
guarantee loans and renewals within the managed SBLGP
portfolio that did not meet the requirements in the federal
SSBCI program. In this year, a total of 124 loans were
granted resulting in $21.1 million of loan guarantees that
supported $37.4 million in small business loans. This
guarantee activity contributed to a total of $197,393,686 of
overall capital that was injected into California's small
business community. The small business owners reported 2,813
jobs created or retained as a result of these loan guarantees.
For fiscal year 2014-2015, I-Bank paid out $457,331 in claims
while recovering $164,633 for the state-funded portion of the
SBLGP. This resulted in losses of less than one percent in
the program on the reserve account and about one-third of a
percent of the outstanding principal amount of the loans.
5.Prior Related Legislation. AB 201 (Holden, Chapter 529,
Statutes of 2013) required the director of the SBLGP to
maintain an internet website including information on the
programs administered through the statewide network of small
business financial development corporations.
AB 780 (Bocanegra) of 2013 would have appropriated $2 million
from the General Fund for the purpose of providing
administrative funding to the FDCs, made each FDC eligible to
receive $150,000, and stated that it is the Legislature's
intent that the FDCs are to be under the jurisdiction of
GO-Biz Status. ( Status: This bill was held in Senate
Appropriations Committee.)
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 the I-Bank within
GO-Biz, and clarified a number of programmatic elements to
improve program delivery.
AB 2523 (Hueso) of 2012 would have authorized the I-Bank to
enter into participation and syndication loan agreements with
SB 936 (Hertzberg) Page 7
of ?
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 the 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
issues relating to business development, private sector
investment, and economic growth.
AB 610 (Price, Chapter 601, Statutes of 2007) limited the
amount of guarantee liability under the Small Business
Expansion Fund to five times the amount of funds on deposit in
the expansion fund or in a corporation's trust fund account
and deleted the provision authorizing the director to allow a
corporation to exceed that leverage ratio.
6.Arguments in Support. The Mayor and City Council of the City
of Sacramento cite that nearly one-third of small business
owners are unable to obtain adequate financing for their
company. The SBLGP promotes statewide economic development by
providing loan guarantees for business owners that would
otherwise not qualify. In the 2014-15 fiscal year, the SBLGP
supported 376 loans resulting in $167.5 million in small
business loans and creating almost 15,000 jobs in California.
Permanently decreasing the loan loss reserve required for the
SBLGP from 20 percent to 10 percent would allow even more
small businesses to participate.
The Association of Financial Development Corporations supports
SB 936 noting that it will help more small businesses by
providing additional lending capacity under the SBLGP.
The Northern California FDC stated their belief that passage
of SB 936 will further stimulate and revitalize the economy,
create jobs, and ensure that there is a reasonable
apportionment of funds going to the hardest hit and most
SB 936 (Hertzberg) Page 8
of ?
economically challenged groups.
The Pacific Coast Regional Small Business Development
Corporation argued that, while the reserve account protects
lenders against losses, the SBLGP has a promising track record
with losses on federal funds less than one percent of the
reserve program since 2011.
7.Proposed Technical Author Amendments. The Author has proposed
one additional technical amendment to this bill in order to
correct the section of
GC § 63089.62 that was intended to be stricken. This amendment
is non-substantive and technical in nature.
SUPPORT AND OPPOSITION:
Support:
Governor's Office of Business and Economic Development (Sponsor)
California Infrastructure and Economic Development Bank
(Sponsor)
Association of Financial Development Corporations
California Asian Pacific Chamber of Commerce
California Association for Local Economic Development
California Association for Micro Enterprise Opportunity
California Association of Independent Business
California Bankers Association
California Black Chamber of Commerce
California Capital Financial Development Corporation
California Chamber of Commerce
California City Economic Development Corporation
California Community Banking Network
California Small Business Association
California Southern Small Business Development Corporation
City of Long Beach
Mayor and City Council of the City of Sacramento
Northern California Financial Development Corporation
Orange County Business Council
Pacific Coast Regional Small Business Development Corporation
San Gabriel Valley Economic Partnership
Silicon Valley Economic Development Alliance
Small Business California
Small Business Development Corporation of Orange County
SB 936 (Hertzberg) Page 9
of ?
Solano Economic Development Corporation
Sun Village Park Association
Superior California Economic Development
Tuolumne County Economic Development Authority
Valley Small Business Development Corporation
Opposition: None received as of April 5, 2016.
-- END --