BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 894 HEARING: 7/6/11
AUTHOR: V. M. Perez FISCAL: Yes
VERSION: 4/25/11 TAX LEVY: No
CONSULTANT: Grinnell
MANUFACTURERS COMPETITIVENESS LOAN AND
LOAN GUARANTEE PROGRAM
Enacts the California Manufacturing Competitiveness Act of
2011.
Background and Existing Law
Local agencies create industrial development authorities
(IDAs) and joint powers agencies (JPAs) to issue industrial
development bonds (IDBs) on behalf of local firms, or issue
bonds themselves, raising proceeds for the firm to invest
in capital equipment in the hope of retaining or expanding
local economic benefits. As such, the local agency, IDA,
or JPA serves as the "conduit issuer," whereby a public
agency substitutes its credit rating, and enters into a
loan agreement with the firm for which the agency issues
the IDB. The issuing agency can also structure the
transaction as an installment sale, whereby the issuer
sells the equipment purchased with the IDB proceeds to the
firm over time, with the firms' payments passed through to
bondholders. The firm also pays for the fees and costs for
issuing the IDB. Issuers always sell IDBs in private sales
to very sophisticated investors, cannot pay more than 12%
interest, and cannot issue more than $10 million each. The
California Infrastructure and Economic Development Bank may
also issue IDBs when the local government does not want to
participate.
The California Industrial Development Financing Advisory
Commission (CIDFAC) within the Office of the State
Treasurer approves the IDA and JPA issuance by IDBs.
CIDFAC also must approve IDB allocations from the state's
tax-exempt private-activity bond cap. State law allows IDB
financing for property used in:
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Industrial uses including, without limitation,
assembling, fabricating, manufacturing, processing, or
warehousing activities with respect to any products of
agriculture, forestry, mining, or manufacture, if
these activities have demonstrated job creation or
retention potential.
Energy development, production, collection, or
conversion from one form of energy to another.
Research and development activities relating to
commerce or industry, including, without limitation,
professional, administrative, and scientific office
and laboratory activities or uses.
Commercial uses located within an enterprise zone
or a recovery zone.
Processing or manufacturing recycled or reused
products and materials by manufacturing facilities.
Business activities with the purpose of creating or
producing intangible property.
Proposed Law
Assembly Bill 894 enacts the California Manufacturing
Competitiveness Act of 2011, which allows CIDFAC to
directly make loans, loan guarantees, or lines of credit
available to companies, directly or through a contract with
a participating financial institution, for the purpose of
acquiring, constructing, or rehabilitating facilities
including, but not limited to, activities currently allowed
in law so long as it inures to the mutual benefit of the
people of the state and to protect their health, welfare,
and safety. The financial instruments authorized under the
bill finance a broad array of activities, including:
Constructing, improving, repairing, and
rehabilitating property.
Land acquisition costs.
Machinery, equipment, furnishings, including
surveys and plans.
Costs of agents, consultants, as well as legal,
financial, accounting, and auditing costs necessary
for the project.
Acquiring and refinancing existing obligations.
Relocation assistance.
CIDFAC shall not start the program until there is
sufficient money in the Manufacturing Program Account,
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which the bill creates within the current Industrial
Development Fund. All moneys received from the federal
government, foundations, or other public or private funding
sources for the purposes of implementing the Act shall be
deposited in that fund, in addition to all loan repayments,
interest, and royalties. The measure bars any general fund
moneys from being deposited in the account, and sunsets on
January 1, 2017.
In developing the program, CIDFAC shall meet the following
objectives:
Encourages the development of the state's long-term
manufacturing capacity.
Creates jobs through the support of retooling and
expansion of manufacturing facilities.
Supports quality manufacturing jobs that provide
high wages, including benefits.
Allows manufacturers to access funds under terms
and conditions which would not otherwise be available
in the private market.
Strengthens the supply chain of small businesses
that support this state's manufacturing
competitiveness.
Assists manufacturers to cost effectively respond
to energy efficiency regulations and new technologies.
CIDFAC's evaluation criteria for reviewing applications and
determining financing approvals shall include all of the
following:
Whether employment benefits arising out of the use
of the financing secures the employment of existing
employees or increases the overall number of full-time
employees of the company.
Whether the company provides compensation for
employees at the project facility which exceeds the
average compensation for similar employment within the
company's jurisdiction or within the state.
Whether the company provides health benefits to
employees employed at the project facility or
contributions to employee retirement benefits.
Whether the project will provide energy, mineral or
natural, or cultivated resource conservation benefits.
Whether the project will include building certified
environmentally beneficial facilities, bringing
existing facilities up to certified environmentally
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beneficial status, or implementing energy efficiency
measures and installing renewable energy equipment.
Whether the company purchases raw materials or
other products from California-based companies.
CIDFAC shall prioritize those applications that:
Retain or create the greatest number of jobs
compensated at a wage rate above the average monthly
wage rate for a similar company in the project
jurisdiction or in the state.
Have the greatest beneficial economic impact on the
state and local economies as a result of the
financing.
Have the greatest negative economic impact on the
state and local economies and on other businesses in
the state if it moved its operations to another state
or otherwise ceased operations within the state.
Submit applications jointly with the union
representing workers at the facility or the union with
pending representation of workers at the facility.
CIDFAC shall assess the creditworthiness of applicants and
the valuation of the guarantees and collateral posted by
the applicant to secure principal and interest on the loan
or repayment of other credit instruments according to
criteria and procedures it adopts. CIDFAC shall adopt
minimum standards for documenting, underwriting, and
servicing loans and other financial assistance it provides
under the program.
Among other requirements, applicants must demonstrate
compliance with federal, state, and local laws and
regulations, or that the requested project will bring them
into compliance. If the firm relocates outside California,
the applicant must repay the loan within six months.
Applicants must demonstrate that the wages it pays are
equal to or greater than the statewide average monthly wage
rate for similar workers in the same industry subsector.
The applicant's turnover rate cannot have exceeded 20%
annually at any facility where moneys obtained by the
program will be used. Successful applicants shall agree to
report to the commission on its capital improvements, total
employment, and wage levels by type of work. The applicant
shall also estimate the number of jobs created or retained
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due to the state assistance as well as any other
performance data as determined by CIDFAC. Additionally,
CIDFAC shall require that for any facility financed under
the program, all workers employed there except maintenance
workers be paid the local prevailing wage.
CIDFAC shall develop a process for the ongoing monitoring
of current and outstanding loans, loan guarantees, and
lines of credit and develop and maintain a database on
loans, loan guarantees, or lines of credit from the fund,
which shall include data related to the applicant,
participating financial institution, the project, the terms
of each loan, loan guarantee, or line of credit, and the
status of each loan, loan guarantee, or line of credit.
The measure requires CIDFAC to adopt minimum standards for
the documentation, underwriting, and servicing of loans,
loan guarantees, or lines of credit made by the commission
or made by participating financial institutions on the
commission's behalf by a participating financial
institution pursuant to the commission's program. The
documentation, underwriting, and servicing standards shall
be designed to promote the integrity of the program, the
fund, and uniformity in the commission's process of
evaluation and due diligence.
The measure erects a process by which CIDFAC accepts and
reviews applications and monitors the financial assistance
it grants under the program, including a database composed
of specified information. CIDFAC shall charge a fee for
its cost for administering the program. CIDFAC can also
provide technical assistance to financial institutions.
The bill adds to the list of property that can be financed
locally or by the program authorized by the bill property
that is incidental to or supporting the activities
currently authorized in law.
The measure requires that participating financial
institutions must be a federally or state chartered bank,
savings association, credit union, or community development
financial institution, any lending institution that has
executed a participation agreement with the Small Business
Administration, or any small business financial development
corporation.
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AB 894 further requires CIDFAC to post on its internet
website or report to the Legislature on the program's
activities, with specified contents. The bill makes
findings and defines its terms, and makes conforming
changes to existing definitions.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . According to the author,
"Historically, the state's economic strategy has been to
aggressively seize new ideas, operationalize the idea and
birth a new industry or transform an old industry. Today,
however, California manufacturing faces increased
competition from other states and nations, which requires
policy makers to help rethink, retool, and rebuild the
state's manufacturing sector. With potentially hundreds of
millions of dollars becoming available from federal
science, technology and industrial development programs,
California needs to prepare itself to most effectively
compete for these moneys. Approval of AB 894 can be one
piece in overall strategy to regain the state's
manufacturing dominance."
2. Sure, but will it work ? In the current "little
depression," governments at all levels are enacting several
different kinds of public policies to increase employment
and economic activity. However, high unemployment levels
persist, suggesting that larger economic forces trump these
government efforts in most cases. AB 894 has great
intentions: set up a wide array of credit facilities
directly or through intermediaries to provide credit to
manufacturing facilities in the state, assuming that a lack
of credit is the principal barrier to more manufacturing
employment. Public policy generally favors manufacturing,
which usually pays higher wages and requires more jobs to
serve nearby supply chains.
However, AB 894 may not achieve its intended goal. First,
it's not clear whether government intervention works to
create manufacturing jobs, or which policies are most
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effective. Second, the primary cause of the little
depression is the lack of consumer demand, not access to
credit, persistently ranking at the top of concerns in the
National Federation of Independent Business survey. Next,
multinational firms for decades have shifted employment to
states and countries where they can produce goods faster
and cheaper than in California. Lastly, where will the
money come from to fund AB 894's ambitious goals? The
Committee may wish to consider whether AB 894 is the right
tool for the job.
3. Manufacturing overview . According to the Assembly
Committee on Jobs, Economic Development, and the Economy's
analysis of AB 894, "California is one of the largest and
most diversified economies in the world with a state gross
domestic product (GDP) of nearly $1.9 trillion in 2009.
For comparison, global GDP was $53.3 trillion, with the
U.S. ($13.8 trillion) having the highest GDP of any
individual nation, followed by Japan ($5.0 trillion),
Germany ($4.9 trillion), China ($3.3 trillion), France
($2.7 trillion), the United Kingdom ($2.2 trillion), Italy
($2.1 trillion), Brazil ($1.6 trillion), Spain ($1.5
trillion), and Canada ($1.3 trillion). Based on these
figures from the International Monetary Fund, if California
were an independent nation it would rank as the eighth
largest economy in the world.
Historically, the state's significance in the global
marketplace resulted from a variety of factors, including:
its strategic west coast location that provides direct
access to the growing markets in Asia; its economically
diverse regional economies; its large, ethnically diverse
population, representing both a ready workforce and
significant consumer base; its access to a wide variety of
venture and other private capital; its broad base of small-
and medium-sized businesses; and its culture of innovation
and entrepreneurship, particularly in the area of high
technology.
Manufacturing is one of the top five private industry
sectors, responsible for employing 1.28 million workers
(9.1%) and contributing over $180 billion to the state's
$1.9 trillion GDP.
A robust manufacturing sector has many benefits, including
high wage jobs and a multiplier effect on other industries
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and businesses. As an example, the Milken Institute
estimates that every job created in manufacturing supports
2.5 jobs in other sectors. In some industry sectors, such
as the electronic computer manufacturing, the multiplier
effect is 16 to one.
Manufacturing is California's most export-intensive
activity. Overall, manufacturing exports represent 9.4%
($120 billion in goods) of California's GDP, and computers
and electronic products constitute 29.3% of the state's
total manufacturing exports. More than one-fifth (21.9%)
of all manufacturing workers in California directly depend
on exports for their jobs.
Manufacturing in California, however, even prior to the
current economic recession, faced many challenges
maintaining global and domestic competitiveness, including
providing a skilled workforce to support the changing needs
of manufacturing and goods movement and maintaining
cost-effective productivity in the face of lower safety and
wage standards in emerging foreign markets.
Using slightly more current data that includes 2010, the
California Manufacturers and Technology Association
estimates that California lost 633,000 manufacturing jobs
from its peak in January 2001 to November 2010. While part
of this reduction reflects the loss of high-tech jobs in
2001 and 2002 and the current recession, the industry as a
whole is suffering. California's loss of manufacturing
jobs is not unusual among Western states. It is, however,
more severe. As the chart below illustrates, California
has lost the highest percentage of manufacturing jobs among
Western states.
Significant drops in consumer spending have led to
workforce reductions and business bankruptcies across the
state. For much of 2009, the number of unemployed workers
rose 40 to 60,000 per month, and 2010 ended with a
seasonally adjusted unemployment rate of 12.5%,
representing 2.25 million people officially identified as
unemployed (excludes those that have stopped looking for
work, among others). The number of persons unemployed 27
weeks or more increased by 230,000 since February of 2010 -
representing a 28.6% increase and over 1 million workers.
Most economic forecasters believe that unemployment will
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remain above 10% throughout 2011 and 2012. Jobs are
forecast to recover to their pre-recession peak by the
first half of 2013, however, unemployment rates are likely
to remain above 8% through much of 2014. State GDP is
expected to average a modest 2.8% in 2011.
Manufacturing, construction, and retail experienced the
greatest decline over the past year, with each of these
sectors shedding over 100,000 jobs across the state.
Forecasters at the University of the Pacific Business
Forecasting Center state that while California will add
255,000 jobs in 2011, increases in the manufacturing sector
are not expected until 2012."
4. Remember Fannie and Freddie . Generally, government
doesn't do the best job of assessing credit risk, a task
that AB 894 asks CIDFAC to do. The Federal National
Mortgage Association (FNMA or "Fannie Mae") and the Federal
Home Loan Mortgage Corporation (FHLMC or "Freddie Mac")
purchased loans from lenders in the hopes of expanding
homeownership opportunities, but also under political
pressure from banks, homebuilders and realtors, among
others. Because of widespread mortgage defaults and
deterioration in the mortgage portfolio, CBO estimates that
the United States Department of Treasury has spent $317
billion cost to make payments on Fannie Mae and Freddie Mac
obligations. While the fund that AB 894 creates to fund
credit is currently empty, and the general fund cannot
deposit money in the fund, should the government step in to
do provide capital that the private sector won't?
5. I guarantee it ? The measure authorizes CIDFAC to grant
loan guarantees once it determines it has sufficient money
to do so. However, with a loan guarantee, CIDFAC is
essentially guaranteeing to repay a loan to the lender if
the borrower defaults. Will CIDFAC have to fully reserve
the amount of the loan guarantee, or only some risk
adjusted amount? If CIDFAC guarantees a loan without
adequate capital, and the borrower defaults, what recourse
does the lender have against CIDFAC or the state? The
Committee may wish to consider adding capital reserve
requirement language and clarifying that CIDFAC, not the
state, is the sole guarantor of the loans. Additionally,
CIDFAC is currently a small office in the Treasurer's
Office that spends less than $300,000 annually, and it's
unclear whether it has the capacity or expertise to
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properly assess creditworthiness for the program that AB
894 seeks to implement. The Committee may wish to consider
steps to help CIDFAC obtain the risk assessment expertise
it needs to fund the right projects.
6. Being Flexible . AB 894 is an extremely flexible grant
from the Legislature to CIDFAC. The bill neither restricts
the size of the firm that can receive benefits, nor the
other forms of government assistance the firm receives.
The bill doesn't specify a maximum interest rate on a loan
or line of credit. While proponents indicate that they
want the measure to be broad enough to account for whatever
strings come attached to money that funds the program, the
Committee may wish to consider if it wants to set limits
around the funding, such as the size of the firm or a
minimum or maximum interest rate on the financial products
it issues or sponsors.
Assembly Actions
Assembly Committee on Jobs, Economic
Development and the Economy 5-0
Assembly Appropriations 17-0
Assembly Floor 77-0
Support and Opposition (6/30/11)
Support : California Labor Federation (sponsor); California
Conference Board of the Amalgamated Transit Union;
California Conference of Machinists; California
Manufacturers and Technology Association; California Small
Business Development Centers; California Small Business
Development Centers, U.C. Merced Regional Network;
California Teamsters Public Affair Council; CDC Small
Business Finance; Communications Workers of America,
AFL-IO, District 9; Engineers and Scientists of California;
Inland Empire Economic Partnership; International Longshore
and Warehouse Union; Professional and Technical Engineers,
Local 21; UNITE HERE!; United Food and Commercial Workers
Union, Western States Council; Yuba Sutter Economic
Development Corporation.
Opposition : Associated Builders and Contractors of
California
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