BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
AB 2671 (V Perez) - Small business financial development
corporations.
Amended: April 26, 2012 Policy Vote: B,P&ED 8-0
Urgency: No Mandate: No
Hearing Date: August 6, 2012 Consultant:
Bob Franzoia
This bill meets the criteria for referral to the Suspense File.
Bill Summary: AB 2671 would extend indefinitely provisions
increasing the amount of guarantee liability outstanding with
respect to the Small Business Expansion Fund (SBEF) to five
times the amount of funds on deposit in the fund or in a
corporation's trust fund account.
Fiscal Impact: Estimated $445,200 annually in increased
guarantee liability from the Small Business Expansion Fund.
Background: Existing law, set to sunset on January 1, 2013, the
maximum leverage ratio for deposits on reserve to payout on loan
guarantees made from the SBEF is one dollar in reserve for every
five dollars (20 percent) guaranteed. Expiration of the sunset
would return the ratio to one dollar in reserve for every four
dollars (25 percent) guaranteed. By increasing that ratio there
would be a 20 percent increase in funds available to guarantee
loans while also increasing risk.
The SBEF was created for the purpose of receiving state moneys
to provide guarantees for loans issued to small businesses by
private financial institutions, typically banks that would
otherwise not approve a term loan or line of credit. As a
result the guarantee, small businesses (particularly women and
minority owned businesses) are able to grow and expand because
they are able to secure financing. The loan guarantee serves as
an incentive for financial institutions to issue loans to
eligible small businesses, where the guarantee covers a
percentage of the loan balance and interest on defaults. As the
overall administrator of the SBEF, the Business, Transportation
and Housing Agency enters into annual contracts with 11
Financial Development Corporations (FDCs). The FDCs market the
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loan guarantee program, coordinate the packaging of the loan and
loan guarantee applications, issue the loan guarantees, and
manage the portfolio of outstanding loan guarantees. The
state's obligations and liabilities are backed by the SBEF and
are limited to the amount of money in the loan guarantee trust
fund.
While increasing the ratio between moneys in reserve and the
moneys available to guarantee more loans will increase the
ability of the FDCs to make loans, it will also increase risk by
increasing the potential for loan defaults. Increases in
default would result in cost pressure to appropriate funds to
the SBEF or it would result in fewer funds being available for
loan.
Related Legislation: AB 610 (Price) Chapter 601/2007 increased
the amount of the guarantee liability outstanding with respect
to the SBEF from four times to five times the
amount of funds on deposit in the fund or in a corporation's
trust fund account until January 1, 2013. In order to provide
an assessment of the impact of increasing this ratio, that bill
required, as part of existing reporting requirements
(Corporations Code 14030.2), to report on loan activities and
default rates over that period.
Staff Comments: The federal State Small Business Credit
Initiative Act of 2010 allocated $168.6 million to the state,
split between the SBEF and the California Pollution Control
Financing Agency in the State Treasurer's Office. Funds not
allocated by 2017 revert to the federal government.
For the SBEF, any small business is eligible for a loan used
primarily in the state and for any standard business purpose
beneficial to the applicant's business, such as expansion into
new facilities or purchase of new equipment. Guarantees can
cover up to 90 percent of the loan amount, with the guaranteed
portion of the loan not exceeding $500,000. The term of the
loan guarantee may extend up to seven years. Interest rates are
negotiated between the borrower and the lender. Collateral is
generally required with each transaction tailored to meet the
borrower's financial situation.
Since 2007-08, the default or loan loss rate for this program is
0.54 percent (2007-08), 1.10 percent (2008-09) 1.86 percent
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(2009-10) and 2.86 percent (2010-11) for an average of 1.59
percent. This analysis averages those years average to estimate
an annual loss rate. As defaults increase, the cost to repay
the fund increases. The table below estimates that cost at
$445,200 annually.
Actual Potential________
Reserve $28,000,000 $28,000,000
Liability $112,000,000 $140,000,000
Leverage 4:1 5:1
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Annual default rate 0.50 percent 0.50 percent
Net default payments $560,000 $700,000
Potential additional payments $140,000
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Five year average net default rate 1.59 percent1.59 percent
Net default payments $1,780,000 $2,226,000
Potential additional payments $445,200
Recommended Amendments: Because the only source of funds likely
available to the SBEF is the federal funding noted above, which
will revert if not allocated by 2017, and defaults have been
increasing, staff recommends the bill be amended to maintain a
five year sunset.