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 --