BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
AB 401 (Ruskin) Hearing Date: June 17, 2009
As Introduced February 23, 2009
Fiscal: No
Urgency: No
SUMMARY Would eliminate the sunset date on a provision of the
California Finance Lenders Law (CFLL), which allows tax-exempt
foundations and charities to make loans for charitable
program-related purposes, as specified.
DIGEST
Existing federal law
1. Allows tax-exempt organizations to make program-related
investments that do not jeopardize their tax-exempt status,
provided that the primary purpose of the investments is to
accomplish one or more specified charitable purposes, and
that no significant purpose of the investments is to
produce income or realize the appreciation of property
(Internal Revenue Code (IRC) Section 4944(c));
2. Defines a charitable contribution as a contribution or
gift to, or for the use of:
a. A state, possession of the United States, or
any political subdivision of any of the foregoing, but
only if the contribution or gift is made for
exclusively public purposes (IRC Section 170(c)(1);
or,
b. A domestic corporation, trust, community
chest, fund, or foundation:
i. Organized and operated exclusively
for religious, charitable, scientific, literary,
or educational purposes, or to foster national or
international amateur sports competition or for
the prevention of cruelty to children or animals,
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no part of the net earnings of which inures to
the benefit of any private shareholder or
individual (IRC Section 170(c)(2)(B) and
170(c)(2)(C)); and
ii. Which is not disqualified for
tax-exempt status by reason of attempting to
influence legislation, and which does not
participate in or intervene in any political
campaign on behalf of or in opposition to any
candidate for public office (IRC 170(c)(2)(D)).
AB 401 (Ruskin), Page 3
Existing law
1. Provides for the CFLL (Financial Code Section 22000 et
seq.), administered by the Department of Corporations (DOC),
to license, oversee, and regulate businesses making consumer
loans and/or commercial loans;
2. Provides for various exemptions from the CFLL for certain
entities that make specified types of loans, including
colleges and universities; broker-dealers, as specified;
persons who make no more than one loan in a 12-month period,
as specified; public corporations; public entities other
than the state; nonprofit agricultural cooperatives; loans
made or arranged by any person licensed as a real estate
broker and secured by a lien on real property; licensed
residential mortgage lenders as specified; cemetery brokers;
commercial bridge loans made by a venture capital company to
an operating company; nonprofit church extension funds; and
franchise loans made by a franchisor to a franchisee
(Financial Code Sections 22050 through 22063);
3. Pursuant to AB 865 (Ruskin), Chapter 316, Statutes of 2005,
exempts both of the following from the CFLL, until January
1, 2010, as specified:
a. A program-related investment defined in IRC Section
4944(c) and United States Treasury Regulations Section
53.4944-3, which is made by a private foundation
tax-exempt organization within the meaning of IRC Section
509(a), as long as that tax-exempt organization does not
also make consumer loans, as those loans are defined
under the CFLL;
b. A loan, guaranty, or investment made by a public
charity tax-exempt organization within the meaning of IRC
Section 509(a)(1) that meets all of the following
requirements, as long as the tax-exempt organization does
not also make consumer loans, as those loans are defined
under the CFLL:
i. The primary purpose of the loan,
guaranty, or investment is to accomplish one or more
of the exempt purposes of the public charity making
the loan, as described in IRC Section 170(c)(2)(B);
ii. Neither the production of income nor the
AB 401 (Ruskin), Page 4
appreciation of property is a significant purpose of
the loan, guaranty, or investment;
iii. No purpose of the loan, guaranty, or
investment is to accomplish one or more of the
purposes described in IRC Section 170(c)(2)(D).
This bill
1. Would delete the sunset date on the provision of law
described immediately above in Existing Law Number 3.
AB 401 (Ruskin), Page 5
COMMENTS
1. Purpose of the bill To permanently allow tax-exempt
foundations and charities to make loans for charitable
program-related purposes, without having to comply with the
lending law meant to apply to for-profit consumer lenders.
2. Background Tax-exempt foundations often make loans for
charitable purposes, to advance their program goals. These
loans, which are known as program-related investments, are
covered by IRC Section 4944(c), summarized above.
Program-related investments are particularly attractive to
foundations, because they allow a foundation to leverage its
assets beyond its annual grantmaking budget, and, in doing
so, assist grantees and advance program objectives.
Prior to enactment of AB 865, DOC received many requests from
non-profit organizations, asking whether the CFLL applied to
their activities. DOC consistently asserted that when a fee
is charged on a loan made by one party to another, the
entity charging the fee is engaging in business as a lender
and must be licensed under the CFLL.
The organizations who supported AB 865 asserted that the CFLL
was not appropriate for, nor was it intended to regulate
lending by tax-exempt foundations and charities for
charitable program-related purposes. Tax-exempt
organizations make loans at no or low interest to other
non-profit organizations, to help those organizations
accomplish their charitable objectives. The loans are
commonly used to provide financing for things like
conservation land acquisitions, the construction of
non-profit facilities, and to provide bridge financing for
non-profits. The Internal Revenue Service regulates and
establishes standards for all of the financial activities of
tax-exempt organizations, including loans. According to the
supporters of AB 865, the application of the CFLL to these
entities was inappropriate. It subjected the foundations to
expensive and cumbersome administrative regulations that
were meant to apply to consumer loans. The supporters of AB
865 contended that, if the CFLL was applied to these
entities, there would be decreased amounts of low-interest
funds available for land conservation, environmental
protection, the arts, health care, affordable housing, and
child care facilities in low-income areas, at a time when
public funds for those activities were scarce.
AB 401 (Ruskin), Page 6
AB 865 represented a negotiated compromise between DOC and
several non-profit organizations to address this issue. As
enacted, the bill was intended to relieve certain non-profit
organizations of the need to comply with CFLL administrative
requirements they viewed as burdensome, while giving DOC the
comfort it needed to ensure that the non-profit organization
exemption was narrowly targeted and would not be abused.
The January 1, 2010 sunset date was intended to allow DOC,
as well as the Legislature, to determine whether the
exemption provided for by AB 865 was working as intended,
before deciding to extend or modify it. To date, DOC has
received no complaints about abuse of the exemption.
3. Support . Myriad non-profit organizations submitted letters
of support for AB 401, citing their significant investments
in California charitable projects since enactment of AB 865
(Ruskin). The Resources Legacy Fund, sponsor of both AB 865
and AB 401, has invested over $160 million in charitable
projects in California since AB 865 was signed into law.
The David and Lucile Packard Foundation invested over $584
million in California charitable projects since the
enactment of AB 865. Both of these organizations, and the
multiple others writing in support of AB 401, state that the
need to extend the current CFLL exemption is critical,
because the current economic downturn has constrained access
to commercial credit and traditional public funding for the
types of projects supported by non-profits. "At a time when
state resources are particularly scarce, a permanent
exemption encourages charitable investments for land
conservation, environmental protection, arts, healthcare,
low-income housing and other public benefit purposes."
4. Opposition None received.
POSITIONS
Support
Resources Legacy Fund (sponsor)
Audubon California
Big Sur Land Trust
California Association of Nonprofits Policy Council
California Council of Land Trusts
California League of Conservation Voters
AB 401 (Ruskin), Page 7
California ReLeaf
California State Parks Foundation
Coalition for Clean Air
David and Lucile Packard Foundation
Forests Forever
Nature Conservancy
Planning and Conservation League
Trust for Public Land
Oppose
None received
Consultant: Eileen Newhall (916) 651-4102