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
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          |Author:   |Hertzberg                                             |
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          |Version:  |April 4, 2016                                         |
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          |Urgency:  |No                     |Fiscal:    |Yes              |
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          |Consultant|Nicole Billington                                     |
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           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)








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          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  








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            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  








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            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,  








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            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  








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            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  








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            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  








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            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








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          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 --