BILL ANALYSIS �
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|Hearing Date:July 2, 2012 |Bill No:AB |
| |2523 |
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SENATE COMMITTEE ON BUSINESS, PROFESSIONS
AND ECONOMIC DEVELOPMENT
Senator Curren D. Price, Jr., Chair
Bill No: AB 2523Author:Hueso
As Amended:May 29, 2012 Fiscal: Yes
SUBJECT: Infrastructure and Economic Development Bank: participation
loans.
SUMMARY: Authorizes the Infrastructure and Economic Development Bank
(I-Bank), upon appropriation by the Legislature, to enter into
participation loan agreements with financial institutions for the for
the I-Bank to purchase interest in loans made or held by banking or
savings organizations to small businesses, and would require the
I-Bank to include in its annual report a summary of the participation
loan agreement program.
Existing law:
1) Authorizes under the Bergeson-Peace Infrastructure and Economic
Development Bank Act (Act) the creation of the I-Bank within the
Business, Transportation and Housing Agency (BTH), to promote
economic revitalization, enable future development, and encourage a
healthy climate for jobs in California. (Government Code (GC) ��
63000 - 63087)
2) Makes several findings and declarations of the Legislature
regarding the Act including the following: (GC � 63000)
a) Create financing pools to access national capital markets or
help government sponsors and public-private economic development
organizations obtain credit enhancement on their own.
b) Increase support for local infrastructure development.
c) The State of California needs a financing entity structure
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with broad authority to issue bonds, provide guarantees, and
leverage state and federal funds using techniques that will
target public investment to facilitate economic development. The
goal is to produce more private sector jobs with less public
sector investment.
3) Defines "economic development facilities" to mean real and personal
property, structures, buildings, equipment, and supporting
components that are used to provide industrial, recreational,
research, commercial, utility, or service enterprise facilities,
community, educational, cultural, or social welfare facilities and
all facilities or infrastructure necessary or desirable, but shall
not include any housing. (GC � 63010 (g))
4) Defines "financial assistance" in connection with a project to
mean, but not be limited to, any combination of grants, loans, the
proceeds of bonds or special purpose trust, insurance,
guarantees, or other credit enhancements and contributions of money,
property, labor or other things of value, as specified. (GC �
63010 (j))
5) Defines "loan agreement" to mean a contractual agreement executed
between bank or a special purpose trust and a sponsor that provides
that the bank or special purpose trust will loan funds to the
sponsor and that the sponsor will repay the principal and pay the
interest and redemption premium, if any, on the loan. (GC � 63010
(n))
6) Defines "participating party" to mean any person, company,
corporation, association, or municipal governmental entity,
partnership, firm or other entity or group of entities, engaging in
business or operations with the state and that applies for
financing from the I-Bank in conjunction with a sponsor for the
purpose of implementing a project, as specified.
(GC � 63010 (o))
7) Defines "project" to mean the designing, acquiring, planning,
permitting, entitling, constructing, improving, extending,
restoring, financing, and generally developing public development
facilities or economic development facilities within the state.
(GC � 63010 (p))
8) Authorizes the I-Bank board to delegate to its executive director,
among other things, the following:
a) Acquire, take title to, and sell lands, structures, real or
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personal property rights, rights-of-way, franchises, easements,
and other interests in lands that are located within the state as
the bank may deem necessary or convenient for the financing of
the project. (GC � 63025.1 (g))
b) Receive and accept from any source, including, but not limited
to, the federal government, the state, or any agency thereof,
loans, contributions, or grants, in money, property, labor, or
other things of value, for, or in aid of, a project, or any
portion thereof. (GC � 63025.1 (h))
c) Make loans to any sponsor or participating party, either
directly or by making a loan to a lending institution, in
connection with the financing of a project, as specified. (GC �
63025.1 (i) and (j))
d) Make, receive, or serve as a conduit for the making of, or
otherwise provide for, grants, contributions, guarantees,
insurance, credit enhancements or liquidity facilities or other
financial enhancements to a sponsor or a participating party as
financial assistance for a project. (GC � 63025.1 (m))
e) Enter into any agreement to contract, execute any instrument,
and perform any act or thing necessary or convenient to, directly
or indirectly, secure the bank's bonds, or the bonds issued by
others. (GC � 63025.1 (r)).
f) Receive subventions, grants, loans, advances, and
contributions from any source of money, property, labor, or other
things of value. The sources may include bond proceeds, dedicated
taxes, federal appropriations, federal grant and loan funds and
public and private sector retirement system funds. (GC � 63025.1
(z))
g) Do all things necessary and convenient to carry out its
purposes and exercise its powers, provided, however, that nothing
shall be construed to authorize the bank to engage directly in
the business of a manufacturing, industrial, real estate
development, or nongovernmental service enterprise. (GC �
63025.1 (aa))
9) Provides that the I-Bank shall, not later than November 1 of each
year, submit to the Governor and the Joint Legislative Budget
Committee a report of its activities and other information as
specified.
10)Additionally authorizes the I-Bank in order to provide or arrange
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for the financing of economic development facilities to issue
taxable revenue bonds, as specified, and tax-exempt revenue bonds,
as specified. (GC � 63045)
11)Provides that the I-Bank may issue revenue bonds and may be secured
and made more attractive to capital markets through financial
instruments, as specified, and that the bank may make loans to help
establish and support the revolving loan funds of small business
development corporations, economic development corporations,
community development corporations, and non-profits. (GC � 63045)
12)Defines "Microbusiness lender" to mean a non-profit or non-bank
lender that serves very small businesses in low- and
moderate-income communities that experience barriers in accessing
capital. These businesses are often owned by minorities,
immigrants, women, and persons with disabilities. Microbusiness
lenders generally provide loans under fifty thousand dollars
($50,000) and offer business technical assistance, both pre-loan
and post-loan, to improve an applicant's ability to qualify and
successfully repay a loan. (GC � 13997.2)
13)Defines "Financial intermediary" to mean an institution, firm,
organization, or individual who performs intermediation between two
or more parties in a financial context, such as connecting sources
of funds with users of funds. A financial intermediary is
typically an entity that facilitates the channeling of funds
between lenders, investors, foundations, or other entities that
have money and are interested in connecting with businesses or
communities where their money can be deployed. Financial
intermediaries include, but are not limited to, banks, financial
development corporations, economic developers, microbusiness
lenders, and community development organizations. (GC �13997.2)
This bill:
1)Makes findings and declarations of the Legislature in regards to the
following:
a) The availability of capital for California small businesses
that are engaged in economic development is critical to continued
job growth and development of the economy of California.
b) Existing state-managed funds constitute a major financial
resource of California. Prudent investment, management, and
coordination of these funds may, together with access to capital
provided in partnership with financial institutions, enhance the
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availability of capital for California small businesses and farms
and contribute to sustainable job growth.
c) This act will help the economic development of this state by
accomplishing the following purposes:
i) Support the economic development of this state by
increasing access to capital for small businesses and farms in
this state in partnership with local financial institutions and
through existing state agency programs and infrastructure.
ii) Support California employment by encouraging and
coordinating investments that can result in job creation and
retention in a sustainable and efficient manner.
iii) Assist in providing stability to the local financial
sector, but not to compete in any way with banks, credit
unions, or other financial institutions.
iv) Fund related governmental operations with a portion of the
program's earnings, when practical.
2)Defines "financial institutions" to mean banking or savings
organizations, including, but not limited to, banks, savings, and
loan associations, and credit unions, authorized to conduct business
in California and state-chartered commercial banks, trust companies,
and savings and loan associations. "Financial institutions" also
includes non-profit organizations that serve as a financial
intermediary or microbusiness leader, as defined.
3)Defines "participation loan agreement" to mean an agreement whereby
the bank would purchase portions of outstanding loans without
servicing, managing, or otherwise administering the underlying loan.
A participation loan agreement may include an agreement to
refinance a loan or package of loans in which the term of the loan
or loans to be refinanced is within 18 months of coming due.
4)Defines "small business" as any of the following:
a) 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, together with affiliates, has 100 or fewer
employees, and average annual gross receipts of ten million
dollars ($10,000,000) or less over the previous three years.
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b) A business that meets the requirements under Part 121 of
Chapter 1 of Title 13 of the Code of Federal Regulations.
c) A business that is eligible for a loan guarantee under the
California Small Business Financial Development Corporation Law.
d) A business that is eligible for a loan guarantee under Article
8 of Chapter 1 of Division 27 of the Health and Safety Code.
e) A non-profit organization that meets the size limitations of
Items a) through d) above.
5)Provides that the I-Bank may, upon an appropriation by the
Legislature for this purpose, enter into participation loan
agreements with financial institutions for the I-Bank to purchase
participation interests in loans made or held by financial
institutions to small businesses and that the I-Bank may promulgate
guidelines to establish the procedures and standards for
implementing this provision.
6)Provides that the I-Bank shall, as part of its report to the
Governor and the Joint Legislative Budget Committee of its
activities and other information as specified, include a summary of
the participation loan program, including a summary of any
participation loan agreements entered into, including, but not
limited to, the number of jobs impacted and created, the number of
businesses assisted, the geographic areas where the businesses were
located, and the industry sectors of the business served, as
defined. This report shall only be required if an appropriation is
made to finance the loan participation program of Item # 5 above.
FISCAL EFFECT: According to the Assembly Committee on Appropriations
analysis dated May 16, 2012, the I-Bank will incur administrative
costs estimated at approximately $5 million to develop and administer
the small business participation loan program. To begin lending, the
Legislature will have to appropriate funds or the I-Bank will have to
divert funds from their infrastructure lending. As a result, this
bill creates General Fund pressure to fund the program or support the
I-bank. (It should be noted that an amendment was taken in
Appropriations Committee which appears to address the above concerns.)
COMMENTS:
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1.Purpose. The Author is the sponsor of this measure. According to
the Author, "Broadening the scope of the I-Bank and its current
funding programs will further economic development in this state.
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 pools.
"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. Background.
a) 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. Among other duties,
the I-Bank has the authority to issue tax-exempt and taxable
revenue bonds.
I-Bank activities are 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 is financed through the California Infrastructure and
Economic Development Bank Fund (CIEDB Fund) and the California
Infrastructure Guarantee Trust Fund, into which fees, interest
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income and other revenues are deposited and from which I-Bank
expenses are paid. The cost of administering the programs of the
I-Bank are off-set by these types of program income. Monies in
these Funds are held within the California State Treasury or by
the bond trustee for the Infrastructure State Revolving Fund
(ISRF) bonds.
The I-Bank is operated on a revolving fund basis and thereby
generates continuous funding for new project investments. The
I-Bank does not receive any ongoing General Fund support for loan
or bond financing, and instead its funding comes from fees,
interest income, and revenues tied to financing activities.
According to its 2009-10 independent audit, its program continues
to provide sufficient revenues to support all operating expenses.
The I-Bank administers two categories of programs: (1) The
Infrastructure State Revolving Fund Program 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, non-profit
organizations, public agencies and other eligible entities.
There is no commitment of I-Bank or state funds for any of the
conduit revenue bonds. Even in the case of default, the state is
not liable.
Since its creation in 1994, the I-Bank has loaned over $400 million
to local agencies and has developed a high-level of expertise in
the implementation of public infrastructure and financing
programs. In addition, over $30 billion in conduit revenue bonds
have been issued by the I-Bank since 2000.
b) Reorganization of the I-Bank. The Governor submitted to the
Little Hoover Commission (Commission) on March 30, 2012,
Government Reorganization Plan No. 2 (Plan) and presented the
plan to the Legislature on May 3, 2012. The Plan proposes to
dismantle BTH and move programs to other existing and new
government entities. The I-Bank is proposed to be relocated to
the Governor's Office of Business and Economic Development
(GO-Biz), along with the Small Business Loan Guarantee Program;
The California Travel and Tourism Commission; The California Film
Commission; and the Film California First Program. The Secretary
of BTH is replaced by the Director of GO-Biz as Chair of 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 had 30 days to analyze the Plan and
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submit its recommendations to the Governor and Legislature. The
Legislature has until July 3, 2012 (60 days) to consider the
Plan. The Plan will go into effect on July 3rd unless the
Legislature takes an action pursuant to a resolution to
disapprove the Plan with a majority of the Members in each house
voting.
On April 23 to April 25, 2012, the Commission held a series of
public hearings and received written testimony, interviewed
experts and reviewed analyses of the departments involved,
including its own previous work when relevant. On April 25, May
11 and May 22, 2012, the Commission also held three public
hearings to develop and discuss its report and recommendation to
the Legislature. In regards to relocating the I-Bank to GO-Biz,
and other changes as mentioned, the Commission stated, "These
moves are consistent with the Commission's previous
recommendations, and the Commission endorses them as they should
bolster the state's economic development efforts." As further
stated by the Commission:
"The I-Bank issues tax-exempt and taxable revenue bonds,
providing low-cost, gap financing for capital costs and
equipment. It has leveraged an initial investment from the
General Fund of $180 million into $420 million in loans.
I-Bank programs target local government infrastructure
project, small manufacturing and processing businesses, and
non-profit corporations such as research institutes and
museums. In testimony to the Commission, the executive
director of the I-Bank said that 'the best part of the
reorganization from I-Bank's standpoint is the moving it out
of an agency and up into the Governor's Office and in a small
group that includes all the key economic development entities
in the administration."
3. Participation Loan Programs. Several states have participation
loan programs such as New York, Illinois, Minnesota, Vermont,
Oregon, Iowa, Connecticut, and North Dakota.
According to the U.S. Treasury, a Participation Loan Program enables
small businesses to obtain medium to long-term financing, usually in
the form of term loans, to help them grow and expand their
businesses. States may structure a Participation Loan Program in
two ways: 1) purchase transactions, also known as purchase
participation, in which the state purchases a portion of a loan
originated by a lender; and 2) companion loans, also known as
co-lending participation or parallel loans, in which a lender
originates a senior loan and the state originates a second (usually
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subordinate) loan to the same borrower. This program enables the
state to act as a lender, in partnership with a financial
institution lender, to provide small business loans at attractive
terms.
Participation loans are considered loans that are shared by a group
of banks that join to make a loan too big for any one of them alone.
The benefits of a Participation Loan program are:
The state benefits from seeing the financial institution
lender's credit analysis, though the state should also conduct
its own underwriting of each loan.
The financial institution lender diversifies its risk by
sharing exposure with the state.
The state may decide to offer its participation at low
interest rates, which reduces the blended rate paid by a small
business.
In a purchased participation, the financial institution
lender conducts all of the customer interaction, including
monthly invoicing, collections, and loan workouts.
1. Related Legislation This Session. AB 1545 (V. Manuel Perez)
expands the role of the
I-Bank to include facilitating infrastructure and economic development
financing activities within the California and Mexico border
region. This measure is scheduled to be heard in this Committee on
July 2, 2012.
AB 2619 (V. Manuel Perez) created the Start-Up California Impact
Investment Fund Program within the I-Bank to provide startup equity
funds to startup firms and small businesses. This measure was held
on the Assembly Appropriations suspense file.
2.Related Legislation. AB 696 (Hueso) of 2011, required projects
selected for funding under the Infrastructure State Revolving Fund
Program to only be funded, if the project meets
specified land use and economic development criteria. This measure was
held on the Senate Appropriations Committee suspense file.
AB 700 (Blumenfield) of 2011, would have established an independently
administered I-Bank. Status: This measure was vetoed by the
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Governor.
AB 893 (V. Manuel Perez) of 2011, would have required the I-Bank to
provide technical support to small and rural communities in
obtaining financing for local infrastructure projects, and include
information on public outreach activities in the I-Bank's annual
report. This measure was held on the Senate Appropriations
Committee suspense file.
AB 1094 (John A. P�rez) of 2011, would have expanded the membership of
the board of directors of the I-Bank from five to seven members.
Was amended on the Senator Floor to deal with a different subject
matter.
AB 1380 (Bass) of 2010, would have expanded the membership of the board
of directors of the I-Bank from five to seven members. This measure
was held in the Senate Rules Committee.
AB 1410 (Bass) of 2010, would have authorized the I-Bank to use certain
federal Community Development Block Grant moneys provided through
the federal American Recovery and Reinvestment Act to create credit
enhancements, loan guarantees, low-interest loans. This measure was
held in the JEDE Committee.
AB 1047 (V. Manuel P�rez) of 2009, would have established a local
assistance program, within the I-Bank, to assist small and rural
communities obtain bond financing for infrastructure projects. This
measure was held in the Assembly Committee on Appropriations.
AB 1272 (Arambula) of 2008, would have established a local assistance
program, within the
I-Bank, to assist small and rural communities obtain bond financing for
infrastructure projects. This measure was held in the Assembly
Committee on Appropriations.
3.Arguments in Support. The California Independent Bankers are in
support of this measure and believe that by increasing access to
capital for small businesses by authorizing I-Bank to enter into
participation loan agreements with financial institutions, this bill
would improve economic development in California and would have a
positive fiscal impact on the State.
The California Workforce Association believes that this measure is a
"win-win for both financial institutions and small businesses. In
the current economy, many financial institutions' ability to lend
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money to small businesses has decreased dramatically. Allowing the
I-Bank to enter into participation loans would enable institutions
to have the additional backing needed to begin lending again to
small businesses."
SUPPORT AND OPPOSITION:
Support:
California Independent Bankers
California Workforce Association
California Bankers Association
Opposition:
None on file as of June 27, 2012.
Consultant:Bill Gage