BILL ANALYSIS Ó
SB 936
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Date of Hearing: June 21, 2016
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT, AND THE ECONOMY
Eduardo Garcia, Chair
SB
936 (Hertzberg) - As Amended June 2, 2016
SENATE VOTE: 39-0
SUBJECT: California Small Business Expansion Fund: corporate
guarantees
SUMMARY: Provides for the increased leverage of moneys assigned to
secure loan guarantees under the Small Business Loan Guarantee Program
(SBLGP).
1)Increases the maximum amount of guarantee liability outstanding at
any one time in the California Small Business Expansion Fund
(Expansion Fund) from five to 10 times the amount of funds on
deposit, plus any receivables due from funds loaned from the
expansion fund to another fund in state government.
2)Lowers the minimum reserves from 20% to 10% of the value of
outstanding loan guarantees attributed to an individual account of a
small business financial development corporation (FDC). Existing
law authorizes the program manager to set a higher leverage ratio,
as necessary.
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3)Removes the January 1, 2018, sunset on the minimum reserve amount,
thereby making the provisions in this bill permanent.
EXISTING LAW:
1)Establishes the IBank within the Governor's Office of Business and
Economic Development (GO-Biz) and authorizes it to undertake a
variety of financial activities including, but not limited to, the
administration of a revolving loan fund, oversight of the Small
Business Finance Center and the issuance of tax-exempt and taxable
revenue bonds.
2)Establishes the Small Business Finance Center within the IBank for
the purpose of assisting businesses seeking capital resources not
otherwise available in the private markets including:
a) Loan guarantees and other credit enhancements;
b) Direct loans and other debt instruments;
c) Disaster loan guarantees; and
d) Surety bond guarantees.
1)Establishes the SBLGP for the purpose of assisting small businesses
obtain long term loans or lines of credit from conventional and
non-traditional financial institutions, which the small businesses
would not otherwise qualify for without the guarantee. Under this
program, FDCs act as financial intermediaries between the state, the
small business, and the financial institution.
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2)Establishes the Expansion Fund for the purpose of retaining the
moneys which capitalize the SBLGP The state has no guarantee
obligation beyond the amount of moneys deposited within the
Expansion Fund. Until January 1, 2018, a reserve of at least 20% of
the value of the guaranteed amount is required to be on deposit in
the Expansion Fund. After January 1, 2018, the minimum reserve is
increased to 25%.
3)Authorizes the program manager to establish one or more accounts in
the Expansion Fund for FDCs participating in one or more programs
Small Business Finance Center programs.
4)Specifies that each account in the Expansion fund is a legally
separate account. Funds in one account are prohibited from being
used to satisfy loan guarantees or other financial product
obligations of another FDC, as specified.
FISCAL EFFECT: Unknown
POLICY ISSUE FRAME:
California offers a range of financial assistance to small businesses.
One of the largest programs is the SBLGP, which is administered
through the Small Business Finance Center at the IBank. Moneys to
capitalize the program are deposited in the Expansion Fund and are
available to make payouts on defaulted loans. The state has no legal
obligation to make payouts beyond the moneys within the Expansion
Fund. Until January 1, 2018, a reserves of at least 20% of the value
of the guaranteed amount is required to be on deposit in the Expansion
Fund. After January 1, 2018, the reserve amount is scheduled to be
increased to 25%.
This bill permanently lowers the minimum reserve amount to 10%. In
considering the appropriateness of this change, it is important to
recognize that the statutory limits are not necessarily the
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operational limits of the program. Within the statutory limits, the
program manager is responsible for setting the reserve ratio for the
overall program, as well as for the individual accounts of the FDCs.
The advantage in lowering the minimum reserve is that additional
guarantees may be issued for small business loans throughout the
state. The analysis includes additional information on the IBank, the
SBLGP, and related legislation. An amendment is suggested in Comment
6.
COMMENTS:
1)The Role of Small Businesses within the California Economy:
California's dominance in many economic areas is based, in part, on
the significant role small businesses play in the state's $2.4
trillion economy. Two separate studies, one by the U.S. Census
Bureau and another by the Kaufman Foundation, found that net job
growth was strongest among businesses with less than 20 employees.
Among other advantages, small businesses are crucial in the state's
international competitiveness and are an important means for
dispersing the positive economic impacts of trade and development
within the California economy.
Nonemployer firms make up the single largest component of businesses
in California, 2.9 million out of an estimated 3.8 million firms in
2013, with the highest number of businesses (515,814) in the
professional, scientific, and technical services industry sector.
As these non-employer businesses grow, they continue to serve as an
important component of California's dynamic economy. Excluding
nonemployer firms, businesses with less than 20 employees comprise
nearly 90% of all businesses and employ over 18% of all workers.
These non-employer and small employer firms create jobs, generate
taxes, and revitalize communities.
In hard economic times, smaller size businesses often function as
economic engines. In this most recent recession the trend
continued, with the number of nonemployer firms increasing from 2.6
million firms ($137 billion in revenues) for 2008 to 3.1 million
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firms ($162.4 billion in revenues) for 2014. 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. Their small size, however, results in
certain challenges in meeting regulatory requirements, accessing
capital, competing for large-size contracts and marketing their
goods and services.
2)Background on the I-Bank: The IBank was established in 1994 to
promote economic revitalization, enable future development, and
encourage a healthy climate for jobs in California. Housed within
GO-Biz, it is governed by a five-member board of directors comprised
of the Director of GO-Biz (chair), the State Treasurer, the Director
Department of Finance, the Transportation Agency, and a Governor's
appointee. The day-to-day operations of the IBank are directed by
the Executive Director who is an appointee of the Governor and is
subject to confirmation by the California State Senate. Currently,
the IBank has authority for 25 staff members.
The IBank does not receive any ongoing General Fund support, rather
it is financed through fees, interest income and other revenues
derived from its public and private sector financing activities.
According to its most recent Comprehensive Annual Financial Report,
its programs continue to provide revenues sufficient to cover
operating expenses.
The IBank administers four primary programs: (1) the Infrastructure
State Revolving Fund which provides direct low-cost financing to
public agencies for a variety of public infrastructure projects; (2)
the Conduit Bond Program which provides financing for manufacturing
companies, public benefit nonprofit organizations, public agencies
and other eligible entities; (3) the California Lending for Energy
and Environmental Needs (CLEEN) Center; and (4) the Small Business
Finance Center which helps small businesses access private financing
through loan guarantees, direct loans, and performance bond
guarantees. There is no commitment of I-Bank or state funds for any
of the conduit revenue bonds. Even in the case of default, the
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state is not liable.
Since its creation in 1994, the IBank has loaned, financed, or
participated in over $34 billion in infrastructure and economic
expansion projects. This includes over $400 million to local and
state agencies, developing a high-level of expertise in the
financing of public infrastructure. The IBank also serves as the
state's only general purpose financing authority with broad
statutory powers to issue revenue bonds, make loans, and provide
guarantees. Over $33 billion in conduit revenue bonds have been
issued by the IBank since 2000.
3)The Small Business Finance Center: The Small Business Finance
Center was established pursuant to AB 1247 (Medina and Bocanegra),
Chapter 537, Statutes of 2013. In addition, to transferring the
SBLGP from the soon to be defunct Business, Transportation and
Housing Agency, the bill modernized the state's delivery of small
business finance, which included providing greater program
flexibility and authority to the IBank Board. Development of AB
1247 was a collaborative effort between the JEDE Committee, GO-Biz,
and the IBank.
The SBLGP is locally administered through nine FDCs, which review
and approve state-backed guarantees on loans made through private
lending institutions. In order to qualify for financial assistance
under the SBLGP, a business must be able to demonstrate that they
are not able to access private financing without the use of the
guarantee.
In 2011, California received significant federal funding through the
State Small Business Credit Initiative (SSBIC), a program
established under the federal Small Business Jobs Act. Under the
federal funding formula, California received $168 million, which is
the largest amount of any state. The next highest award was $97
million for Florida, with every state that applies receiving a
minimum of $13.1 million. One-half of California's moneys are being
used to capitalize a second and slightly modified SBLGP that
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reflects the nuisances of the federal requirements.
Since receiving the federal funds, the priority of the SBLG Program
has been to use the federal funds, rather than the state guarantee
funds. In 2014-15, the state guarantee was exclusively used for
renewals within the portfolio and for guarantees that were not
eligible under the federal requirements. In FY 2014-15, 124 loans
($37.4 million) were guaranteed using $21.1 million in state funds.
Borrowers reported that 2,813 jobs were created or retained under
the state-side of the SBLGP.
In fiscal year 2014-15, 252 guarantees were made for a total of $130
million in loans using $92.8 million of federal State Small Business
Credit Initiative funds. Borrowers reported that 11,781 jobs were
created or retained.
4)Default Rates: The SBLGP is over 30 years old and has been overseen
by a range of state entities. Its historically low default rate is
a testament to the diligence and skill of the FDCs who provide both
technical and financial assistance to the small businesses they
serve.
In 2007, legislation was enacted to lower the reserve amount from
25% to 20%. [AB 610 (Price), Chapter 601, Statues of 2007] In the
years prior to change, the SBLGP had a default rate at or below
traditional lenders: 0.25% in 2005-06 and 0.10% in 2004-05. The
five-year default rate in 2005-06 was 0.79%. The default rate for
the comparable portfolio of the Small Business Administration is
3.5% to 5%.
Even in the challenging economic times of the great recession, the
SBLGP had very limited defaults, as shown in the chart below.
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-------------------------------------------------------------------
|Defaults in the Small Business Loan Guarantee Programs (2011-2015) |
| |
| |
-------------------------------------------------------------------
|----------+-------------------------+------------------------------|
| | Federal Funds | State Funds |
| | | |
| | | |
|----------+-------------------------+------------------------------|
| 2011 | 0.000% | 0.632% |
| | | |
| | | |
|----------+-------------------------+------------------------------|
| 2012 | 0.000% | 0.488% |
| | | |
| | | |
|----------+-------------------------+------------------------------|
| 2013 | 0.008% | 0.401% |
| | | |
| | | |
|----------+-------------------------+------------------------------|
| 2014 | 0.073% | 0.150% |
| | | |
| | | |
|----------+-------------------------+------------------------------|
| 2015 | 0.030% | 0.178% |
| | | |
| | | |
-------------------------------------------------------------------
-------------------------------------------------------------------
| Source: GO-Biz 6/7/2016|
| |
| |
-------------------------------------------------------------------
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5)The Need for Active Management of Underserved Areas and Supporting
Underserved Population Groups: California has benefited greatly
from the additional federal funding for SBLGP activities. Prior to
receiving these funds, the state program was struggling to scale up
after being effectively shut down in 2009 and 2010. The federal
funding not only provided new capital, but more importantly ensured
that the FDCs had an ongoing source of capital on which to build
programs and hire financial professionals to meet the needs of small
businesses within their regions.
Given California's growing income inequality, resources such as the
SBLGP offer the state a rare opportunity to counter this disturbing
econmic trend. Research shows that net new job growth is actually
strongest among businesses with less than 20 employees and that
entrepreneurial activity often serves as a catalyst for building
economic stability within communities, neighborhoods, and individual
households.
----------------------------
| Chart 1 - Comparison of |
| Business Growth by Race, |
| Ethnicity, and Veterans |
----------------------------
|-----------------+---------|
| Business | Percent |
| Ownership | Change |
| | 2007 to |
| | 2012 |
| | Number |
| | of all |
| | Firms |
|-----------------+---------|
|Asian American | 44.3% |
|Women | |
|-----------------+---------|
|Asian American | 25.7% |
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|Men | |
|-----------------+---------|
|Black Women | 67.5% |
|-----------------+---------|
|Black Men | 18.8% |
|-----------------+---------|
|Hispanic Women | 87.3% |
|-----------------+---------|
|Hispanic Men | 39.3% |
|-----------------+---------|
|White Women | 10.1% |
|-----------------+---------|
|Veteran Women | 29.6% |
|-----------------+---------|
|Veteran Men | 7.7% |
---------------------------
----------------------------
| Source: 2012 Survey of |
|Business Owners |
| |
| |
| |
----------------------------
The 2012 Survey of Business Owners, published by U.S. Census Bureau,
offers additional data as to the important role that businesses can
play in dispersing economic benefits among underrepresented groups.
Among other findings, the data shows a 27.5% increase in women-owned
businesses between 2007 and 2012, as compared to a 7.9% increase in
businesses owned by men. Women-owned businesses also experienced
the greatest increase in the number of people they employed and
wages paid. Chart 1 displays data on the growth of business
ownership during the report period for selected groups.
The SBLGP annually reports on a number of financial elements,
including defaults, as well as the race/ethnicity, and gender of
borrowers. Beginning in 2017, the annual report will also include
data on geographic location of businesses served. [AB 1537 (JEDE),
Chapter 191, Statutes of 2015]
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------------------------
| Chart 2 - California |
| Businesses |
| |
| |
------------------------
|----------+-----+-------|
|All firms |100% |3,548,4|
| | | 49 |
| | | |
| | | |
|----------+-----+-------|
| Male |52.2%| |
| | | 1,852,580|
| | | |
| | | |
|----------+-----+-------|
|Female |37.2%|1,320,0|
| | | 85 |
| | | |
| | | |
|----------+-----+-------|
|Co-Owned | | |
|M/F |8.8% |315,782|
| | | |
| | | |
|----------+-----+-------|
|White | |2,343,4|
| |66% |39 |
| | | |
| | | |
|----------+-----+-------|
|Black |4.90%|177,302|
| | | |
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| | | |
| | | |
|----------+-----+-------|
|American |1.10%|41,254 |
|Indian | | |
|and | | |
|Alaska | | |
|Native | | |
| | | |
| | | |
|----------+-----+-------|
|Asian | 17% |604,870|
| | | |
| | | |
| | | |
|----------+-----+-------|
|Hispanic | 23% |815,304|
| | | |
| | | |
| | | |
------------------------
------------------------
| Source: 2012 Survey of |
| Business Owners|
| |
| |
| |
| |
| |
------------------------
Of the 376 loans guaranteed in 2014-15 using the federal and state
funds, 64.63% were male, 17.02% were women, and 18.35% were co-owned
by men and women. The race/ethnicity of the owners of the small
businesses assisted: Caucasian 62.77%; Asian/Pacific Islander
8.51%; Hispanic 9.31%; African American 3.19%; Asian Indian 4.52%;
and Native American 0.80%.
Comparing the 2014-15 loan guarantees to the overall make-up of
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California businesses (Chart 2), shows that, overall, the ownership
of businesses accessing the SBLGP during the report period was more
heavily comprised of businesses owned by white males. The
percentage of businesses equally co-owned, whoever, was twice the
state average, 18.35% v. 8.8%.
While there are many factors that contribute to making a program
accessible to small businesses, these comparative reviews do suggest
that the IBank specifically engage with FDCs on what actions they
have taken and will take in the future to serve a more
representative group of businesses.
Encouraging the active management of the SBLGP is an important duty
of the program manager and existing law provides him or her with key
tools by which to accomplish this responsibility. First, each FDC
has a statutory duty to undertake program activities that provide
outreach to low-resource small businesses and microbusineses and to
partner with other financial and community partners to accomplish
this duty, GC§ 63088.6. Second, existing law also requires each FDC
to submit an annual written plan of operation to the program
manager, which should encompass all of its contractual duties, GC
§63089.1. Third, the program manager has the authority to
distribute and even withhold Expansion Fund moneys to ensure FDCs
meet program responsibilities, as outlined in their annual contract,
GC §63089.1. Collectively, these duties and responsibilities
underscore the fundamental mandate of the program to serve a wide
range of small businesses from across the state that have a
representative ownership that reflects the diversity of the state.
6)Amendment for the Committee's Consideration: By removing the sunset
provisions, the bill eliminates one method by which the public and
the Legislature periodically focus on leverage ratios and default
rates of the SBLGP. On a going forward basis, it may be appropriate
to codify the specific role of the IBank Executive Director in
reviewing the setting of loan guarantee reserve ratios with the
program manager.
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7)Related Legislation: Below is a list of the related bills.
a) AB 610 (Price): Leverage of the Small Business Expansion Fund:
This bill enhances the Small Business Loan Guarantee Program's
ability to leverage existing program dollars resulting in the
ability to serve more small businesses financial needs per year.
More specifically, the bill authorizes a 20% reserve to
outstanding loan guarantees rather than a 25% reserve. Status:
Signed by the Governor, Chapter 601, Statutes of 2007.
b) AB 1247 (Medina and Bocanegra) Small Business Finance Center:
This bill establishes the California Small Business Finance
Center at the IBank, within the Governor's Office and Economic
Development, and transfers the authority to administer the small
business loan guarantee program, direct disaster loans, surety
bond guarantees, and other related programs to the I-Bank.
Status: Signed by the Governor, Chapter 537, Statutes of 2013.
c) AB 1537 (Assembly Committee on Jobs, Economic Development, and
the Economy) Small Business Finance Center: This bill expands
reporting requirements for programs financed through the
California Small Business Finance Center by including annual
reporting on the general geographic location of assisted
businesses. This information is essential to monitoring that
small businesses throughout the state have access to these
programs. Status: Signed by the Governor, Chapter 191, Statutes
of 2015.
d) AB 2671 (Assembly Committee on Jobs, Economic Development and
the Economy) Small Business Access to Capital: This bill
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extends, until January 1, 2018, the sunset date on the maximum
allowable leverage of reserve funds necessary under Small
Business Loan Guarantee Program. On January 1, 2013, the maximum
leverage rate was scheduled to return to 25% or four dollars for
every one dollar of loan guaranteed. This bill allows the
program to continue to operate at the 20% reserve limit. The
Director of the SBLGP has the discretion to set a lesser leverage
amount for the overall program and for any individual small
business financial development corporation. Status: Signed by
the Governor, Chapter 648, Statutes of 2012.
REGISTERED SUPPORT / OPPOSITION:
Support
California Infrastructure 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 Businesses
California Bankers Association
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California Black Chamber of Commerce
California Capital Financial Development Corporation
California Chamber of Commerce
California City Economic Development Corporation
California Coastal Rural Development Corporation
California Community Banking Network
California Small Business Association
California Southern Small Business Development Corporation
City of Dublin
City of Fountain Valley
City of Long Beach
City of Sacramento
Northern California Financial Development Corporation
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Orange County Business Council
Pacific Coast Regional Development Corporation
San Gabriel Valley Economic Partnership
Silicon Valley Economic Partnership
Small Business California
Small Business Development Corporation of Orange County
Small Business Majority
Solano Economic Development Corporation
Southwest California Legislative Council
Stanislaus Business Development Center
Sun Village park Association
Superior California Economic Development
Tuolumne County Economic Development Corporation
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Valley Small Business Development Corporation
Opposition
None Received
Analysis Prepared by:Toni Symonds / J., E.D., & E. / (916)
319-2090