BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
AB 2523 (Hueso) - Infrastructure and Economic Development Bank:
participation loans.
Amended: August 6, 2012 Policy Vote: BP&ED 6-1
Urgency: No Mandate: No
Hearing Date: August 16, 2012
Consultant: Mark McKenzie
SUSPENSE FILE.
Bill Summary: AB 2523 would authorize the California
Infrastructure and Economic Development Bank (I-Bank) to enter
into participation loan agreements and syndicated loan
agreements with financial institutions for loans they make to
small businesses.
Fiscal Impact:
Estimated I-Bank staff costs (1 Program Manager and up to 3
analytical staff PYs) to the I-Bank in the range of
$400,000 to $600,000 annually to establish and administer
the program, likely over several fiscal years until the
program is self-sustaining (I-Bank Fund).
General Fund cost pressures of at least $5 million, to
purchase interests in participation and syndicated loan
agreements with financial institutions for lending to small
businesses.
Background: Existing law creates the I-Bank within the Business,
Transportation and Housing Agency, to promote economic
revitalization, enable future development, and encourage a
healthy climate for jobs in California. As of July of 2013, the
I-Bank will be relocated to the Governor's Office of Business
and Economic Development (GO-Biz), pursuant to the Governor's
Reorganization Plan No.2. The I-Bank administers the
Infrastructure State Revolving Fund Program, which provides
direct low-cost loan financing for public infrastructure
projects, and several programs that provide tax-exempt revenue
bond financing for manufacturing companies, nonprofit
organizations, and specified public agencies. The I-Bank is
financed by fees, interest income, and other revenue from its
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financing activities.
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 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 financial institutions that join together 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.
In a purchased participation, the financial institution
lender conducts all of the customer interaction, including
monthly invoicing, collections, and loan workouts.
Conversely the state takes on the risk and must do its own
underwriting to ensure the lender took into account the proper
level of risk and to keep the state from purchasing poor quality
loans with unacceptable risks of default.
Proposed Law: AB 2523 would authorize the I-Bank to enter into
participation loan agreements and syndicated loan agreements
with financial institutions for loans made to small businesses,
upon appropriation of funds by the Legislature. The bill
defines "loan syndication" as a process of involving multiple
lenders in providing various portions of a loan to a single
borrower, and defines "participation loan agreements" as an
agreement whereby the I-Bank would purchase a portion of
outstanding loans without servicing, managing, or administering
the underlying loan, which may involve refinancing of a loan or
package of loans. AB 2523 would also require the I-Bank to
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include in its annual report a summary of program activities,
including the number of jobs impacted and created, the number of
businesses assisted, the geographic areas that those businesses
serve, and the industry sectors of those businesses.
Staff Comments: This bill is intended to expand the scope of
I-Bank activity to include direct financial assistance to small
businesses, which is expected to strengthen economic development
activities in the state. This bill would presumably enhance the
availability of capital to these businesses and allow them to
expand.
The I-Bank would incur costs in the range of $400,000 to
$600,000 for up to 4 PY of new staff to establish the program,
including costs to develop and adopt guidelines, and ongoing
administration, loan underwriting, continued oversight, and
potential outside contracting. This level of funding would
likely be required annually until the program is self-sustained
by fees and payments recoverable from program participants.
Staff notes that the bill does not identify a funding source,
and it is likely that the I-Bank would need at least $5 million,
and potentially up to $10 million, in funding to purchase a
sufficient number and types of loan shares in order for the
program to be self-sustaining. Since the I-Bank cannot divert
revenue from existing lending and financing activities, this
bill would create a significant General Fund cost pressure.