BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 624 HEARING: 6/29/11
AUTHOR: J. Pérez FISCAL: Yes
VERSION: 6/21/11 TAX LEVY: No
CONSULTANT: Grinnell
COMMUNITY DEVELOPMENT FINANCIAL INSTITUTION
TAX CREDIT
Extends and doubles the Community Development Financial
Institutions tax credit.
Background and Existing Law
Current federal law allows a new markets tax credit for
taxpayer's qualified equity investments in community
development entities, the primary mission of which must be
serving, or providing investment capital for, low-income
communities or low-income persons, as certified by the
Secretary of the Treasury. The federal credit is equal to
39% of the qualified equity investment, and is spread over
seven years.
State law does not conform to the federal new markets
credit, but instead establishing the Community Development
Financial Institution credit (CDFI), administered by the
Department of Insurance (DOI) (AB 1520, Vincent, 1997).
Taxpayers may claim a credit equal to 20% of qualified
investments in the form of non-interest bearing deposits,
loans, or equity investments of at least $50,000 held for
at least 60 months. The credit was initially used only to
reduce Personal Income Tax, or Corporation Tax liabilities,
but the Legislature added a credit against the Gross
Premiums Tax in 1999, also administered by DOI (AB 157,
Vincent). In 2002, the Legislature extended the credit
until 2007 (SB 409, Vincent), and again extended it until
2012 (AB 2831, Ridley-Thomas, 2006).
A CDFI must be certified by the California Organized
Investment Network (COIN), an office in DOI, by
demonstrating that it is a private financial institution
located in California, its primary mission is community
development, and that it lends in urban, rural or
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reservation-based communities in California. COIN is a
collaborative effort between DOI, the insurance industry,
community economic development organizations, and community
advocates. COIN was established in 1996 at the request of
the insurance industry as an alternative to state
legislation that would have required insurance companies to
invest in underserved communities (similar to the federal
Community Reinvestment Act that applies to the banking
industry).
CDFIs may be banks, credit unions, or non-regulated
non-profit institutions organized to provide private
capital for community development or investing. CDFIs
provide private capital for minority small businesses and
low-income borrowers who traditionally have been
underserved by conventional lending institutions. There are
almost 50 CDFIs in California, located mostly in urban
areas.
COIN certifies the amount of the investment and the credit,
which is capped at a total of $10 million each year, but
any unused amount may be carried over to future years.
COIN allocates the credits on a first-come, first-served
basis. Until October 1st of each year, the total amount of
investments in any one CDFI may not exceed the lesser of
$10 million or 40% of the annual aggregate amount, although
the Insurance Commissioner can specify an alternative
amount or a different date. Until July 1st of each year,
25% of aggregate qualified investments are reserved for
admitted insurance companies, but again, the Insurance
Commissioner may specify an alternate percentage or
different date. Additionally, until July 1st of each year,
the amount of investment reserved for investments of less
than $300,000 is either $3 million, or an alternative date
or amount determined by the Insurance Commissioner. DOI or
the Franchise Tax Board (FTB) may recapture the credit
within the 60 month period if the taxpayer reduces or
withdraws the investment.
Proposed Law
Assembly Bill 624 extends the CDFI credit until January 1,
2017. The measure doubles the total amount of investment
that DOI certifies as eligible for the credit from $10
million to $20 million annually, so that the credit
allocated increases from $2 million to $4 million.
AB 624 - 6/21/11-- Page 3
ab 624 also creates the COIN Advisory Board, composed of
the Insurance Commissioner or his or her designee, and at
least one voluntary member from:
An insurance company executive
A licensed attorney practicing law
A member of the public appointed by the Speaker of
the Assembly
A member of the public appointed by the Senate
Committee on Rules
A consumer advocacy group
A local economic development practitioner
A financial institution or community development
financial institution
The board shall elect a Chair. Members serve two year
terms, staggered by drawing lots at its first meeting so
that a simple majority serves two-year terms, with the
remaining members serving one year terms.
The board's purpose is to advise COIN or its successor on
the best methods of increasing the level of insurance
industry capital in safe and sound investments while
providing fair returns to investors and social benefits to
underserve communities. The board shall meet quarterly, or
as directed by the Commissioner, and can be reimbursed for
actual expenses.
State Revenue Impact
According to FTB, the March 31st version of AB 624 results
in revenue losses of $200,000 in 2011-12, $420,000 in
2012-13, $450,000 in 2013-14, and $450,000 in 2014-15. FTB
notes that the revenue estimate does not include reduced
Gross Premiums Tax revenues. Additionally, the author
amended the measure on June 22nd to double the amount of
credits that the Department of Insurance can award. Given
historical participation rates, increasing the amount of
credits may not have any revenue effect unless more
investors take advantage of the credit.
Comments
1. Purpose of the bill . According to the Author, "The
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California Organized Investment Network (COIN) is a
voluntary program that facilitates insurance industry
investments that provide solid returns to investors and
economic and social benefits to California's underserved
urban and rural communities. COIN tax credits provide an
efficient and effective investment incentive and result in
substantial leveraging of private investment capital that
is critical to projects undertaken throughout our state."
2. Double-down ? The CDFI credit can scarcely be called a
success. Despite a $2 million annual cap, participation
has floundered. DOI has not allocated credits that reached
the cap in several years, and only awarded $330,000 in
credits in 2010, leaving a total balance of $4.67 million
in unused credits accrued in the last six years.
Additionally, firms awarded the credit include some of the
world's largest financial institutions and insurance
companies that remain profitable despite a global
recession, such as Wells Fargo, Bank of America, Farmers',
and Pacific Life Insurance Company. Sophisticated
investors seek good returns, and will invest in low-income
communities only if they think there's money to be made.
Lenders generally only make loans when they expect to be
repaid with interest. At best, tax credits provide a
gentle nudge for investors to look at low-income areas, but
often serve as a reward for an investment that would be
made anyway.
While the Insurance Commissioner has written to insurance
companies, and some have responded with substantial
investments, is the CDFI credit truly an effective tool for
drawing new investments into low-income communities? The
Legislature can require insurance companies to invest
directly in low-income communities, similar to the federal
Community Reinvestment Act, or directly fund investments
itself. With direct spending, the Legislature can compare
the merits of this program against other priorities as part
of the state budget process, instead of granting tax
credits which are not subject to budgetary scrutiny.
Additionally, tax credits only help profitable firms which
have tax liability sufficient to offset the value of the
credit, notwithstanding insurance companies taxed under the
GPT that can always make use of the credit. The Committee
may wish to consider whether extending a credit of doubtful
success is merited in this time of fiscal crisis and
significant cuts to public services, not to mention
AB 624 - 6/21/11-- Page 5
doubling it.
3. Answering the call . After years of relative neglect,
Insurance Commissioner Dave Jones wrote to insurance
company CEOs in February, 2011, calling on them to enhance
their level of investment in underserved communities, and
letting them know that the CDFI credit existed for doing
so. In response Farmers Insurance Exchange invested $7
million, $2 million from Pacific Life Insurance Company,
and $2 million from State Farm Mutual Automobile Insurance
Company to Impact Community Capital LLC, a CDFI in San
Francisco. In exchange for an $11 million, zero interest,
five-year loan to benefit underserved communities, the
insurance companies will receive a 20% tax credit of $2.2
million.
4. LAO's take . AB 2831 (Ridley-Thomas) required the LAO
to prepare an analysis of the CDFI credit. LAO's April 14,
2011 letter to the Chair of the relevant committees in the
Assembly and Senate included their conclusions, among them:
Economic Impact . It is very difficult to estimate
the impact of the tax credits, although we suspect
that in many cases investments in the CDFIs would not
have been made in the credit's absence. It is true
that some of the credits have benefited larger CDFIs
that are capable of raising funds in other ways and
for which the credit-funded investments represent a
smaller portion of their total assets. Even in these
cases it seems likely that the tax credits helped
generate investment activity that otherwise might not
have been funded.
Credit Percentage Seems Reasonable . This credit is
set up like most investment credits in that it refunds
a percentage of the invested amount, and 20 percent is
the equivalent of about 2.5 to 3 percentage points on
a ten-year loan at prevailing interest rates. This is
about one-half of the interest rate spread between a
fairly safe investment and a very risky one. For
example, recently, the difference between the rates on
a BBB (low investment-grade) bond and a CCC ("junk")
bond was about 6 percent. While we have no reason to
believe that a 20 percent subsidy is too high or too
low, it is possible that changing conditions in
financial markets in the future could warrant a
AB 624 - 6/21/11-- Page 6
different subsidy percentage for this credit.
Owned Versus Rental Housing . The CDFIs have
supported both rental and owner-occupied housing,
including both construction and mortgage loans.
Credit standards for home purchase loans have
increased markedly since the collapse of the housing
market. In order to benefit lower-income individuals,
it may make sense for housing development efforts to
focus more on rental housing at least in the near
future. Accordingly, the Legislature may wish to
consider focusing the tax credit more on CDFI
investments in rental housing opportunities to benefit
low-income populations.
First-Come, First-Served Tax Credits Can Be
Problematic . In some prior years, the program has hit
its annual cap. If the credit is retained in its
current form, it may be advisable to authorize COIN or
some other entity to award the credits competitively
instead of on a first-come, first-served basis. This
might allow the state to prioritize CDFI investments
that best fit desired policy objectives-for example,
by directly benefiting lower-income people instead of
benefiting projects that merely are located in
lower-income areas.
5. Bored of boards ? In recent years, the Legislature has
eliminated boards and commissions it deemed unnecessary,
most notably the California Integrated Waste Management
Board. The Governor proposed eliminating 43 more in his
Revised Budget Proposal in May, including the Managed Risk
Medical Insurance Board and the Unemployment Insurance
Appeals Board. While AB 624's COIN board members don't
receive compensation, only reimbursement of actual
expenses, is a legislatively-created board truly necessary
to administer the COIN program? The Insurance Commissioner
can create any board he sees fit within his office without
statutory authorization. The Committee may wish to
consider whether legislatively establishing another board
when the trend in public policy is going the opposite way.
Assembly Actions
Assembly Insurance 10-0
AB 624 - 6/21/11-- Page 7
Assembly Revenue and Taxation 7-0
Assembly Appropriations 17-0
Assembly Floor 75-2
Support and Opposition (6/23/11)
Support : Association of Financial Development
Corporations; Congress of California Seniors; California
Department of Insurance; California Organized Investment
Network; Community Development Finance Institution;
Personal Insurance Federation of California; Local
Initiatives Support Corporation; Low Income Investment
Fund; National Federation of Community Development Credit
Unions; Rural Community Assistance Corporation; San Luis
Obispo County Housing Trust Fund; Self Help Federal Credit
Union, Neighborhood National Bank; NCB Capital Impact;
3CORE
Opposition : Unknown.