BILL ANALYSIS �
AB 2523
Page 1
Date of Hearing: April 17, 2012
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
V. Manuel P�rez, Chair
AB 2523 (Hueso) - As Introduced: February 24, 2012
SUBJECT : Infrastructure and Economic Development Bank:
Participation Loans
SUMMARY : Authorizes the California Infrastructure and Economic
Development Bank (I-Bank) to enter into participation loan agreements
with financial institutions for the purpose of expanding capital
opportunities for small businesses. Specifically, this bill :
1)Authorizes the I-Bank, upon appropriation by the Legislature, to
enter into participation loan agreements with financial
institutions. Under these agreements, the I-Bank purchases a
participation interest in an existing loan held by the financial
institution. Compensation for the I-Bank's participation would
come from collecting interest and principle payments on a pro rata
basis of a loan or a package of loans.
2)Defines an eligible financial institution as including banks,
savings and loan associations, credit unions authorized to conduct
business in California and state charted commercial banks, trust
companies and savings and loan associations.
3)Defines an eligible small business as an independently owned and
operated business that is not dominant in its field of operation,
the principal office of which is located in California, the
officers of which are domiciled in California, and, which has 100
or fewer employees and average annual gross receipts of ten million
dollars ($10,000,000) or less over the previous three years, or is
a manufacturer, with 100 or fewer employees.
4)Authorizes the I-Bank to promulgate regulations to establish
procedures and standards for entering into participation loan
agreements.
5)Expands the I-Bank's existing reporting requirements to include
information on activities related to this bill, as well as the
policies and practices of the I-Bank for the investment and
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management of state funds.
EXISTING LAW :
1)Creates the I-Bank, within Business, Transportation and Housing
Agency (BTH), for the purpose of promoting economic revitalization,
enabling future development, and encouraging a healthy climate for
jobs in California.
2)Authorizes the I-Bank to make loans to any sponsor or participating
party in connection with the financing of a project. The project
loan may be made either directly or by making a loan to a lending
institution. The I-Bank may also make agreements to enter into
loans for refinancing of projects. However, no loan shall exceed
the total cost of the project as determined by the sponsor or the
participating party and approved by the bank.
3)Defines a "project" to mean designing, acquiring, planning,
permitting, entitling, constructing, improving, extending,
restoring, financing, and generally developing public development
facilities or economic development facilities within the state.
FISCAL EFFECT : Unknown
COMMENTS :
1)Author's purpose : According to the author, "Small businesses are a
critical component of California's economy. They comprise 98% of
all businesses in the state, employ more than 50 percent of
California's workforce, and generate more than half of the state's
gross domestic product. Expanding the I-Bank's funding programs by
providing loans to small businesses will spur job development and
economic growth."
"Presently, the I-Bank has the authority to issue revenue bonds,
make loans and provide credit enhancements for a wide variety of
infrastructure and economic development projects. Eligible
applicants include local government entities, including cities,
counties, special districts, assessment districts, joint powers
authorities and non-profit corporations formed on behalf of a local
government. AB 2523 will include small businesses in I-Bank
eligibility pool."
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"A direct and coordinated investment between the I-Bank and
California's small businesses is an innovative and viable approach
to address California's economic challenges. Providing small
businesses with increased access to capital will revitalize
communities and improve the quality of life for California's
employees and small business owners."
2)Challenges in small businesses access to capital : Even as many
areas of California are pulling out of the recession, small
businesses continue to report that they face challenges in
accessing and retaining credit through traditional financial
institutions. For their part, financial institutions report that
stricter federal regulations have left them with little flexibility
in applying underwriting criteria to a small business community
that has been especially hard hit during the recession.
Businesses with less than 100 employees comprise nearly 98% of all
businesses, and are responsible for employing more than 37% of all
workers in the state. Therefore, finding ways to address this
access to capital disconnect is essential for the state's full
economic recovery.
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 within the
California economy. California small businesses comprised 96% of
the state's 60,000 exporters in 2009, which accounted for over 44%
of total exports in the state. Nationally, small businesses
represented only 31.9% of total exports. These numbers include the
export of only goods and not services.
Historically, small businesses have functioned as economic engines,
especially in challenging economic times. During the nation's
economic downturn from 1999 to 2003, microenterprises (businesses
with fewer than five employees) created 318,183 new jobs or 77% of
all employment growth, while larger businesses with more than 50
employees lost over 444,000 jobs. From 2000 to 2001,
microenterprises created 62,731 jobs in the state, accounting for
nearly 64% of all new employment growth. More recently, the
federal Small Business Administration's Small Business Economy
2011, states that small businesses nationally outperformed large
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firms in net job creation nearly three out of four times from 1992
through 2010 when private-sector employment rose.
During this current economic downturn, however, small business
owners have been especially hard hit. Equifax has reported that
bankruptcies in California rose by 81% in 2009, as compared to 44%
nationally. This trend continued in 2010 where the Equifax report
stated that while in general bankruptcies were down across the
nation including some regions in the west, small business
bankruptcies in California accounted for almost 20% of all small
business bankruptcies in the nation.
3)Changing financial markets : From being reserved for only the most
complex and large size loans, the use of multi-lender financing is
becoming a common structure for addressing the capital needs of
small businesses. These types of transactions can take many forms,
as proposed to be amended, AB 2523 proposes the use of two:
syndications and participation loan agreements.
One of the key factors impacting the ability of a financial
institution to provide loans is the lenders capitalization. In
general, federal law and regulation allow a financial institution
to loan $100 for every $1 of money held in reserve. Once the
initial loan is given, the lender must hold a certain amount of
money in reserve until the debt is repaid. Regulators carefully
review lenders financial records to ensure that sufficient moneys
are held in reserve and that lenders are adhering to prescribed
risk limitations. In the past few years, this need to recapitalize
has resulted in some lenders discontinuing small business lines of
credit, choosing to not renew expiring loans, and tightening the
underwriting standards for new business loans. In short, accessing
the necessary capital to maintain and grow businesses has become
very difficult.
Without multi-lender financial structures, institutions can be
limited in their ability to meet the financial needs of a customer.
As one example, a growing business may need a loan that would
require a financial institution to loan an amount that exceeds its
lending limits. By bringing in one or more additional lenders, the
needs of the business can be effectively met through its current
lender without requiring the business to undertake an extended
search for a larger size lender that can both accommodate the size
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of the loan and be willing to extend the loan.
From the financial institution's perspective, multi-lender
financial structures offer a number of key advantages, including,
but not limited to, allowing an institution to continue serving a
long-time customer, offering new lending opportunities to emerging
and small community development financial institutions, and
providing diversification to the institution's loan portfolio,
which benefits the overall risk to capital ratio.
4)Managing multi-lender financial structures : As proposed to be
amended, AB 2523 authorizes the I-Bank to facilitate and/or enter
into two specific types: syndication and participating loan
agreements. As the name suggests, each of these entail the sharing
of some percentage of an individual loan or a package of loans by
one or more financing entities.
Two of the key structural differences between the types of loans is
the relationship between the borrower and the individual financial
institutions and who sets the terms for the loans. In a
syndication model, the lead bank sets the terms and each bank signs
a loan agreement with the borrower and receives a note representing
their individual share of the indebtedness. This means that each
lender in the syndication has a separate and distinct relationship
and risk profile with the borrower.
Alternatively, under a participation loan agreement, the lead
lender sets both the terms and serves as the sole entity that deals
with the borrower. The other lenders in a participation agreement
have no rights directly against the borrower and must advance their
interests through the lead lender.
5)Oversight hearing : In March 2011, the Assembly Jobs, Economic
Development and the Economy (JEDE) Committee held an oversight
hearing to examine how the I-Bank's activities impacted local,
state and federal economic recovery efforts and California's
economic position in the post-recession economy. Following the
hearing, JEDE released a preliminary list of recommendations to
better align the authorities of the I-Bank with the state's current
and future economic development and infrastructure needs. JEDE
Members voted to amend four bills to address many of the structural
and infrastructure related recommendations including: AB 696
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(Hueso), AB 700 (Blumenfield), AB 893 (V. Manuel P�rez) and AB 1094
(John A. P�rez). The Governor vetoed these measures and, instead,
proposed to reorganize the I-Bank within the administrative
structure of the Governor's Office of Business and Economic
Development.
Recommendations related to increasing the I-Banks engagement on
economic and business development issues were deferred for
additional research and discussion. This year, two measures were
introduced by JEDE Committee Members that would heighten the
I-Bank's role in meeting the access to capital needs of small
businesses: AB 2523 relating to debt finance and AB 2619 (V. M.
P�rez) relating to equity capital.
6)Amendments : Committee staff understands that the author will offer
amendments that do the following:
a) Authorize the I-Bank to establish a California Preferred
Broker-Dealer Program whereby the I-Bank would enter into
cooperative agreements with financial institutions that serve as
financial intermediaries with community development banks.
These cooperative agreements would be based on the financial
institution's ability to:
i) Demonstrate experience in working with community
development lenders;
ii) Commit a percentage of their own capital in each loan or
loan package;
iii) Facilitate the syndication and/or take the lead position
on participation loan agreements in a manner that serves the
needs of small business and provides a basis for the issuance
of loan-back securities by the I-Bank.
b) Provide priority access to certain state small business loan
guarantees.
c) Extend the definition to financial institution to include
nonprofit financial intermediaries and microbusiness lenders.
d) Clarify that the participation loan agreements can include
the refinancing of loans where the term of the existing loan is
within 18 months of coming due.
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e) Specify that the purpose of the program is to fill gaps in
the financial market relative to small business access to
capital.
f) Provide a more generic definition of a "participation loan
agreement" in order to provide the I-Bank with flexibility in
designing a program that best reflects the needs of small
businesses in accessing private sector capital.
g) Modify the definition of a small business to be consistent
with the state's other small business lending programs, i.e. the
Small Business Loan Guarantee Program and the California Capital
Access Program. Also include small size nonprofit
organizations.
h) Add a definition for co-finance of loans and syndication.
i) Remove the requirement to promulgate regulations, and,
instead, requires the I-Bank Board of Directors to adopt
guidelines.
j) Remove the general reporting language relating to the
policies and practices used by the I-Bank to invest and manage
money, and, instead, add more specific detail on outcomes
including the number of jobs created and retained, number of
businesses served, geographic distribution of loans and the
industry sectors of the businesses served.
7)Background on the I-Bank : The I-Bank was established in 1994 to
promote economic revitalization, enable future development, and
encourage a healthy climate for jobs in California. Housed within
BTH, it is governed by a five-member board of directors comprised
of the BTH Secretary (chair), State Treasurer, Director Department
of Finance, Secretary of the State and Consumer Services Agency,
and a Governor's appointee. The day-to-day operations of the
I-Bank 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 I-Bank has authority for 24 staff
members.
The I-Bank does not receive any ongoing General Fund support,
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rather it is financed through fees, interest income and other
revenues derived from its public and private sector financing
activities. According to its 2009-10 independent audit, its
programs continue to provide sufficient revenues to support all
operating expenses.
The I-Bank administers two categories of programs: 1) The
Infrastructure State Revolving Fund (ISRF) which provides direct
low-cost financing to public agencies for a variety of public
infrastructure projects; and 2) Bond Financed Programs which
provide financing for manufacturing companies, nonprofit
organizations, public agencies and other eligible entities. There
is no commitment of I-Bank or state funds for any of the category
#2 conduit revenue bonds. Even in the case of default, the state
is not liable.
Since its inception, the I-Bank has loaned over $400 million to
local agencies, developing a high-level of expertise in the
financing of public infrastructure. The I-Bank also serves as the
state's only general purpose financing authority with broad
statutory powers to issue revenue bonds. Over $30 billion in
conduit revenue bonds have been issued by the I-Bank since 2000.
The I-Bank has also been involved in other unique financings,
including Tobacco Securitization Bonds, Tribal Compact Asset
Securitization Bonds, and Imperial Irrigation District Preliminary
Loan Guarantees.
8)Reorganization of the I-Bank : On March 30, 2012, the Governor
submitted a reorganization plan to the Little Hoover Commission,
which proposes the following I-Bank related items:
Dismantle BTH and move programs to other existing and new
government entities. Overall, the number of state agencies is
reduced from 12 to 10.
Move the following programs from BTH to the Governor's Office
Business and Economic Development (GO-Biz):
o Small Business Loan Guarantee Program;
o The California Travel and Tourism Commission;
o The California Film Commission;
o The Film California First Program; and
o The I-Bank.
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Replace the Secretary of BTH with the Director of GO-Biz as
Chair of the California Travel and Tourism Commission and the
I-Bank. The newly established Secretary of Transportation
replaces the Secretary of State and Consumer Services on the
I-Bank board.
The Little Hoover Commission has 30 days to analyze the
reorganization plan and submit its recommendations to the Governor
and Legislature. The Legislature then has 60 days to consider the
plan. The plan goes into effect unless the Legislature takes an
action to disapprove the plan with a majority of the Members in
each house voting.
1)Related legislation : Below is a list of related bills.
a) AB 901 (V. Manuel P�rez) Implementation of Small Business
Jobs Act : This bill expands the definition of financial
institutions and increases reporting requirements in the
California Capital Access Program, which is one of the programs
receiving multimillion dollars in federal and state funding for
small businesses through the federal and state Small Business
Jobs Act of 2010. Status: The bill was signed by the Governor,
Chapter 483, Statutes of 2011.
b) AB 981 (Hueso) Implementation of the Small Business Jobs Act :
This bill modifies the administrative procedures to the
California Capital Access Program in order to encourage greater
participation by financial institutions. This is one of the
programs receiving multimillion dollars in federal and state
funding for small businesses through the federal and state Small
Business Jobs Act of 2010. Status: The bill was signed by the
Governor, Chapter 484, Statutes of 2011.
c) AB 1632 (Blumenfield) State Small Business Jobs Act : This
bill provides the necessary statutory changes in the area of job
creation and small business development in order to implement
the 2010 Budget Act. The bill transfers $32.4 million from the
General Fund to support four small-business and jobs programs
that exist in current law. The funding appropriated in this
bill goes to the Small Business Loan Guarantee Program ($20
million); California Capital Access Fund ($6 million); Small
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Business Development Centers ($6 million); and the Federal
Technology Centers ($350,000). Status: The bill was signed by
the Governor, Chapter 731, Statutes of 2010.
d) AB 2619 (V. Manuel P�rez) Start-Up California Impact
Investment Fund : This bill authorizes the I-Bank to administer
the Start-Up California Impact Investment Fund Program for the
purpose of providing equity financing to start-ups and other
small size businesses. Status: The bill pending in the
Assembly Committee on Jobs, Economic Development and the
Economy.
10)Double referral : The Assembly Committee on Rules voted to refer
this measure to JEDE and the Assembly Committee on Banking and
Finance. Should this measure be approved at the April 17, 2012
hearing, the bill will be referred to the second policy committee
for additional policy consideration.
REGISTERED SUPPORT / OPPOSITION :
Support
The California Bankers Association
Opposition
None Received
Analysis Prepared by : Toni Symonds / J., E.D. & E. / (916)
319-2090