BILL ANALYSIS Ó
AB 2619
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Date of Hearing: April 17, 2012
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
V. Manuel Pérez, Chair
AB 2619 (V. M. Pérez) - As Introduced: February 24, 2012
SUBJECT : Start-Up California Impact Investment Fund Program
SUMMARY : Establishes the Start-Up California Impact Investment
Venture Fund Program for the purpose of providing equity investments
to start-ups and small businesses. Specifically, this bill :
1)Requires the Infrastructure and Economic Development Bank (I-Bank)
to establish criteria, priorities, and guidelines for the selection
of eligible businesses, which shall, at a minimum:
a) Encourage the establishment of start-ups and growth of small
businesses.
b) Offer financial opportunities to emerging managers.
c) Support business development in lower income areas of the
state.
d) Encourage business development that includes the export of
products from California.
e) Encourage manufacturers to bring production lines back to
California.
2)Authorizes the I-Bank to contract with professional equity fund
managers who have demonstrated expertise in economically targeted
and impact investments.
3)Requires the I-Bank to consult with appropriate state and local
agencies and investors that have investment policies that target
businesses in lower income communities.
4)Defines "start-up equity capital" as money and resources invested
in start-up firms and small businesses with exceptional growth
potential. In exchange for this capital, the I-Bank receives an
equity stake in the firm represented by shares of common or
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preferred stock.
5)Provides that no liability is incurred by the I-Bank or the state
as related to the startup equity fund beyond the extent to which
funds are on deposit in the start-up equity fund account.
6)Requires the I-Bank to establish a reasonable schedule of
administrative fees, which shall be paid by the applicants to
reimburse the state for the costs of administering this program.
7)Requires annual reporting of equity investments by number, size and
type of firm, by industry sector. The report is required to also
include a description of the direct and indirect employment impact.
EXISTING LAW :
1)Creates 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. The I-Bank is authorized to offer a variety of
financial products and services including, but not limited to,
direct loans for the purpose of financing infrastructure and
issuing tax-exempt and taxable revenue bonds to underwrite the cost
of infrastructure development.
2)Authorizes the I-Bank to receive contributions or grants in the
form of money, property, labor, or other things of value from any
source for the purpose of advancing a project.
FISCAL EFFECT : Unknown
COMMENTS :
1)Author's purpose : According to the author, "California has the
ability to do a better job of encouraging private investment in
California's historically underserved capital markets. With the
Kaufman Foundation's research showing that more than 90% of all
jobs created between 1977 and 2005 came from small and early stage
firms, it is essential that the capital access needs of these
business be addressed. Other states have been stepping up their
game and re-committing to a broader range of financing programs,
including direct loans, guarantees and credit enhancements in
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partnership with private lenders and equity financing in
conjunction with experienced private sector financial asset
managers."
"California has a very limited set of tools and only operates
direct loan and credit enhancement programs to assist small
businesses and start-ups. This bill provides an important new tool
for small businesses, many of which are woman and minority owned,
to attract early stage private investors."
2)California's small business economy : California's dominance in
many economic areas is based, in part, on the significant role
small businesses play in the state's $1.9 trillion economy.
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.
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. Small businesses have consistently functioned
as economic engines, especially in challenging economic times.
During the nation's economic downturn from 1999 to 2003,
microenterprises (businesses with less 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.
In this current recession, however, small businesses have been
particularly hard hit by the problems in the capital markets
resulting from the financial crisis and a drop in consumer
spending. Equifax reports that small business bankruptcies were up
81% for the 12 months ending September 2009, as compared to the
same period in the previous year. Nationally, bankruptcy filings
were up 44% during the same term.
3)New drivers of the California economy : As California moves slowly
out of the recession, key demographic trends will place additional
hurdles on the state's economic growth and recovery. Baby boomers,
who are aging out of the marketplace, will be replaced by a second,
but significantly smaller, wave of new workers and entrepreneurs.
This demographic trend not only reflects a generational shift in
the U.S., but it also reflects a shift in the majority race and
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ethnicity of the working age population. The California Budget
Project estimates that by 2020, nearly 60% of the working age
population in California will be comprised of Latinos,
African-Americans, and Asian-Americans.
Accompanying these demographic shifts is a substantial increase in
minority purchasing power. In the U.S., minority purchasing power
is expected to triple from $1.3 trillion in 2000 to over $4
trillion by 2045. This represents over 70% of the growth of total
U.S. purchasing power during the same time period. Latino and
African-American purchasing power is already so significant in the
U.S. that if it were compared to national GDPs it would be greater
than all but nine economies in the world. As the purchasing power
of minority communities expand, traditional product lines and
services will need to evolve, while markets for new products will
increase.
AB 2619 addresses one of the significant needs of the emerging
minority and ethnic-based marketplace - the need for business
capital. Research shows that the growth of minority owned firms in
the beginning of the decade surpassed the growth of all U.S.
businesses, growing at a rate of 17% per year, which is six times
the growth rate of all other firms. Sales from minority owned
firms also outpaced revenues in general - growing 34% per year -
more than twice the rate of all other firms.
However, even with these impressive growth numbers, minority and
women-owned businesses face systemic capital constraints. Unlike
the Baby Boomers, the emerging working age population is less
likely to have inherited wealth or have pre-existing ties to the
business community. In fact, research shows that African-Americans
and Latinos are turned down for loans at three times the rate of
similarly situated white applicants. Their participation rates in
private equity and venture capital, in particular, are also low.
4)Start-ups key to job creation : In 2011, the Kaufman Foundation
released a study that found that more than 90% of all jobs created
between 1997 and 2000 came from small and early stage firms and
that a lion's share of these jobs came from firms in existence
fewer than five years. Consistent with these findings, data from
the U.S. Census Bureau shows that from 1990 to 2003 nearly 80% of
jobs created came from firms employing 20 or fewer employees. This
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means that addressing the capital access needs of small businesses
and start-ups is essential to the state's economic recovery and job
creation priorities.
California currently provides several loan and loan guarantee
programs including the Capital Access Program, administered through
the State Treasurer's Office, and the Small Business Loan Guarantee
Program, administered through BTH and a statewide network of small
business financial development corporations. AB 2619 expands these
financing options by providing a state-sponsored equity financing
program to partner with private sector investment money managers.
5)Competition from other states : California has historically been a
national leader in start-ups and venture capital. The state's slow
recovery from the recession has offered a unique opportunity for
other states to be innovative and provide new access to business
capital programs.
As evidence, a large number of states have recently created or will
soon create venture funds to support entrepreneur-centered economic
development strategies. Among other sources of new capital, states
have allocated a portion of their federal Small Business Credit
Initiative (SBCI) funding including the following: Arkansas,
Florida, Hawaii, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland,
Missouri, Nebraska, New Hampshire, New Jersey, New York, Ohio,
Oklahoma, Puerto Rico, Rhode Island, Tennessee, Texas, Washington,
West Virginia and Wisconsin.
Washington State used its $19.6 million in federal SBCI moneys to
fund direct and guarantee loan programs, as well as capitalizing a
new venture fund. The $5 million in federal money allocated for
Washington's venture fund is reported to have attracted another $20
million in private investor capital. The Washington Department of
Commerce reports that for every $1 the state invests, approximately
$15 to $18 will be generated in private lending or investment,
potentially injecting $300 million into the state economy and
generating 3,000 to 6,000 direct and indirect jobs.
In another example, the Missouri Technology Corporation, a
public-private partnership created by the Missouri Legislature,
established the Missouri TechLaunch, which offers pre-seed funding
to start-ups for intellectual property development, including
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market analysis, proof of concept, and prototype design and
development. Individual awards cannot exceed $100,000 and may be
in the form of equity or convertible debt.
Competition among states for attracting start-ups goes beyond
California's traditional competition, such as Texas and Washington.
Nebraska has a new venture program and a tax credit for angel
investors. The North Dakota Development Fund, a new venture
capital program through the Bank of North Dakota, provides debt and
equity investments for early stage companies in strategically
targeted industries.
6)Emerging managers and their role in increasing diversity : Like
many other professions, minority and woman representation among
investment managers at the highest financial levels has been
limited. As the economic opportunities in minority and women owned
businesses grows, investors are also looking to diversify their
internal and external management teams. Several California-based
pension funds have taken steps to increase diversity among their
asset managers including: the California Public Employees
Retirement System, the California State Teachers Retirement System,
Los Angeles City Employees Retirement System, Los Angeles Police
and Fire, and Los Angeles County Employees.
Based on fiduciary duty and the need to demonstrate prudent
management of their beneficiary's assets, institutional investors
select asset managers based on a strict set of criteria that
generally requires, among other things, extended years of
experience managing large investment funds (over $500 million), and
having your own money to invest, as a means for demonstrating
alignment of financial interests, sometimes called "skin in the
game." Some believe that this high-experience based selection
criteria can become a "catch-22" for emerging managers. This
potential disconnect between qualified and highly motivated
emerging managers and the more experienced money managers threatens
the long term success of large institutional investment funds. AB
2619, which would be established as a small size equity investment
fund, addresses this disconnect by providing an opportunity for
qualified emerging managers to link with large institutional
investors around impact investments.
7)Background on the I-Bank : The I-Bank was established in 1994 to
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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 of the
Department of Finance, Secretary of 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,
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 creation in 1994, 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.
8)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
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and infrastructure related recommendations including: AB 696
(Hueso), AB 700 (Blumenfield), AB 893 (V. Manuel Pérez) and AB 1094
(John A. Pérez). 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 (Hueso) relating to debt finance and AB 2619
(V. Manuel Pérez) relating to equity capital.
9)Reorganization of the I-Bank : On March 30, 2012, the Governor
submitted a reorganization plan to the Little Hoover Commission,
which 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 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 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. A repositioned I-Bank within GO-Biz offers a
range of cost effective and innovative options for advancing the
state's economic position. AB 2619 is one of several bills being
heard by JEDE in April 2012 that leverages existing programs and
resources.
10)Related legislation : Below is a list of related bills.
a) AB 901 (V. Manuel Pérez) Implementation of Small Business
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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 millions of dollars in federal and state funding 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 millions of dollars in federal and state
funding 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
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.
11)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
Assembly Committee on Jobs, Economic Development and the Economy
(sponsor)
Calexico County Enterprise Zone
California Association for Microenterprise Opportunity
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Coachella Valley Economic Partnership
Imperial Valley Enterprise Zone
Sacramento Black Chamber of Commerce
Opposition
None Received
Analysis Prepared by : Toni Symonds / J., E.D. & E. / (916)
319-2090