Under the Small Business Financial Assistance Act of 2013, the California Infrastructure and Economic Development Bank, within the Governors Office of Business and Economic Development, administers specific programs relating to small business, either administered directly by the bank or under contract with small business financial development corporations. The act authorizes bank programs to offer surety bond guarantees. The act prohibits a corporation from guaranteeing any loan unless and until it makes specified determinations, including that there is a low probability that the surety bond would be granted by a financial institution or financial company under reasonable terms or conditions, and the beneficiary has demonstrated a reasonable prospect of successful completion of the project.

This bill would modify that prohibition to refer to a surety bond instead of a loan and would add private bonding companies to those entities considered when calculating the probability that a surety bond would be granted.

The act, in addition to the authority described above, authorizes a corporation to act as a guarantor on a surety bond for any small business contractor, including, but not limited to, women, minority, and disabled veteran contractors.

This bill would expand those entities for which a corporation may act as a guarantor on a surety bond to include disadvantaged business enterprise contractors. The bill would require a surety bond program to include technical assistance to a participating contractor, as prescribed. The bill would authorize the bank, in implementing a surety bond program under the act, to assign all or part of the program to another state entity in a prescribed manner, to establish one or more pilot projects before approving directives and guidelines for a statewide surety bond and small contractor assistance program, and to establish one or more nonstate contracts under specific circumstances.

The act continues in existence the California Small Business Expansion Fund (expansion fund), a continuously appropriated fund that includes General Fund moneys. The expansion fund may be used to pay defaulted loan guarantee or surety bond losses, or other financial product defaults or losses, to fund direct loans and other debt instruments, to pay administrative costs of corporations, to pay state support and administrative costs, and to pay costs to protect a real property interest in a financial product default.

By expanding the activities of the bank that are funded by continuous appropriation from the expansion fund, this bill would make an appropriation.

Existing law requires that public contracts with state agencies provide for the filing of separate performance and payment bonds by the contractor in the form of bonds executed by an admitted surety insurer, as provided.

This bill would establish, in the Department of General Services, a statewide contractor bonding program, to be administered by the Office of Small Business and Disabled Veteran Business Enterprise Services, for the purpose of enabling participating contractors to meet any applicable bid, payment, or performance bonding requirements for public contracts with state agencies. This bill would authorize the office to act as guarantor on surety bonds for participating contractors on contracts with state agencies and require the office to provide specified technical assistance to participating contractors. The bill would authorize the office to charge participating contractors fees for the provision of these services, not to exceed the amount necessary to cover the costs incurred in the administration of these provisions.

This bill would require the office to establish a request for the proposals process by which contractors may participate in the program as a participating contractor and to give preference to contractors that are disadvantaged business enterprises, small business enterprises, or disabled veteran business enterprises, as specified. The bill would authorize the office to terminate a contractors participation after a reasonable period of time if the contractor is no longer in compliance with the requirements of the program or suspend a participating contractor that defaults on a bond from transacting any business with the state for a period of not less than 3 years and not more than 10 years.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

AB 2270 (Bonta) - California Infrastructure and Economic Development Bank: surety bond program

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

AB 2270 would modify an existing statewide surety bond guarantee program for small business contractors within the California Infrastructure and Economic Development Bank (I-Bank).

Fiscal Impact:

The Governor’s Office of Business and Economic Development (GO-Biz) indicates that it would incur ongoing General Fund costs of approximately $1.1 million for the I-Bank to administer the program. Additionally, the bill would result in a

one-time General Fund appropriation of at least $10 million in order to guarantee the surety bonds.

Background:

GO-Biz oversees the I-Bank, which administers the California Small Business Finance Center (Center). The Center administers programs to assist businesses seeking new capital resources, including, but not limited to, the SBLGP. The State currently has the authority to operate a surety bond guarantee program through the Small Business Center at the I-Bank, but the bank does not currently offer these guarantees. Funding for technical assistance and collateral capitalization would be needed for the I-Bank to provide these services.

A surety bond is a three-party financial agreement between a surety, the contractor, and the project owner, in this case the state. The agreement binds the contractor to comply with the terms and conditions of a contract. If the contractor is unable to successfully perform the contract, the surety institution assumes the contractor's responsibilities and completes the project.

The federal Small Business Administration (SBA) offers a surety bond guarantee program for small and emerging contractors that cannot otherwise obtain surety bonds through regular commercial channels. The SBA guarantee covers contracts up to $2 million. A contractor applying for an SBA surety guarantee must qualify as a small business, in addition to meeting specific eligibility criteria for surety bonding.

Proposed Law:

This bill would do all of the following:

• Expand and add specificity to an existing small business contractor program (Program), which offers surety bond guarantees to help businesses in obtaining surety bonds through the private market.
• Specifically identify disadvantaged business enterprises as eligible applicants for the Program. Current law authorizes any small business contractor, including, but not limited to, women, minority, and disabled veteran businesses as eligible applicants.
• Authorize I-Bank to (1) assign all or part of the Program to another state entity, but require I-Bank to retain responsibility for reporting on the use and outcomes of the Program, (2) establish one or more pilot projects before adopting guidelines for a statewide Program, and (3) establish new contractor relationships for the purpose of implementing the Program, as specified.
• Require that the Program include technical assistance, as specified.

Related Legislation:

• AB 484 (Gipson) of 2015, proposed to authorize the Small Business Finance Center, administered through the I-Bank, to include insurance, coinsurance, and other forms of surety among the types of financial products included in programs administered by the I-Bank. This bill was held under submission on the Suspense file of the Assembly Appropriations Committee.
• AB 1695 (Bass) of 2007 proposed to activate the Surety Bond Guarantee Account, administered by the Small Business Loan Guarantee Program, for the purpose of providing surety bond guarantees for small businesses that provide services on state and federally funded transportation projects. This bill was held under submission on the Suspense file of the Assembly Appropriations Committee.

Staff Comments:

As noted previously, GO-Biz indicates that this bill would result in ongoing General Fund costs of approximately $1.1 million for the I-Bank to administer the program. These costs represent $150,000 for one staff loan officer at the I-Bank and $861,000 for I-Bank to contract with the Financial Development Corporations (FDCs) to administer the program and provide statewide technical assistance. This arrangement is similar to the General Fund support the I-Bank receives to administer the Small Business Loan Guarantee Program (SBLGP).

Additionally, the bill would result in a one-time General Fund appropriation of at least $10 million in order to guarantee the surety bonds. As a point of comparison, the State dedicates $30 million to support the SBLGP.

-- END --

SENATE COMMITTEE ON

BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT

Senator Jerry Hill, Chair

2015 - 2016 Regular

Bill No: AB 2270 Hearing Date: June 27, 2016

Subject: California Infrastructure and Economic Development Bank: surety bond program

SUMMARY:

Modifies an existing statewide surety bond guarantee program for small business contractors within the California Infrastructure and Economic Development Bank (I-Bank).

Existing law:

1. Establishes the Governor’s Office of Business and Economic Development (GO-Biz) to serve as the lead state entity for economic strategy and marketing of California on issues relating to business development, private sector investment, and economic growth. (Government Code (GC) §§ 12096 – 12098.5)
2. Establishes, by the Small Business Financial Assistance Act of 2013, the California Small Business Finance Center within I-Bank to assist businesses seeking capital resources not otherwise available in the private market including: (GC §§ 63088 – 63089.98)
   1. Loan guarantees and other credit enhancements;
   2. Direct loans and other debt instruments;
   3. Disaster loan guarantees; and
   4. Surety bond guarantees.

This bill:

1. Expands and adds specificity to an existing small business contractor program (Program), which offers surety bond guarantees to help businesses in obtaining surety bonds through the private market.
2. Specifically identifies disadvantaged business enterprises as eligible applicants for the Program. Current law authorizes any small business contractor, including, but not limited to, women, minority, and disabled veteran businesses as eligible applicants.
3. Authorizes I-Bank to assign all or part of the Program to another state entity, but requires I-Bank to retain responsibility for reporting on the use and outcomes of the Program.
4. Authorizes I-Bank to establish one or more pilot projects before adopting guidelines for a statewide Program.
5. Authorizes I-Bank to establish new contractor relationships for the purpose of implementing the Program, as specified.
6. Requires that the Program include technical assistance, as follows:
   1. Assessment and identification of the particular barriers facing the participating contractor and development of solutions to those barriers, as specified.

• 1. Identification of, and assistance in obtaining, other financial support and resources, as specified.

FISCAL EFFECT:

According to an Assembly Appropriations Committee analysis dated April 27, 2016, this bill would result in an ongoing General Fund cost of approximately $1.1 million. These costs represent $150,000 for one staff loan officer at I-Bank and $861,000 for I-Bank to contract with the Financial Development Corporations to administer the program and provide statewide technical assistance. Also, this bill would result in a one-time General Fund appropriation of at least $10 million in order to guarantee the surety bonds.

COMMENTS:

1. Purpose. The Author is the Sponsor of this bill. According to the Author, “Because of a variety of factors, bonding is difficult for small contractors to obtain and a large segment of the State’s construction companies are unable to bid on state convened work and thus engage in profitable public sector work. Surety bond underwriters assess a wide range of factors that most small and minority contractors struggle with—the pipeline of work, experience, access to capital, organization, and structure, to name a few. Inability to obtain bonding means that many small contractors are unable to access the large pool of state construction currently underway and planned for the future. Contractors cannot even submit bids as prime contractors for projects over $100,000 (less in some cases) without a bond, and neither public agencies nor prime contractors are willing to risk contracting with unfamiliar, unbondable contractors.

“Due to lack of funding, I-Bank has been unable to activate a surety bond guarantee program for small businesses. This bill would activate and add specificity to the existing program. In addition to providing financial support to qualifying small businesses, AB 2270 would provide technical support to help them navigate the labyrinthine state procurement process. Establishment of a statewide bonding assistance program would enable small and diverse businesses the opportunity to work on projects such as High Speed Rail, water and highway infrastructure, and other development within the state.

“It has been demonstrated that with appropriate support, small contractors can be competitive, expanding bidding pools (lowering project costs), hiring local workers and successfully completing public construction work that contributes significantly to the local and state economy. A Sacramento State University study found that doing business with small state companies generated more in net new revenue growth and net new jobs than larger businesses.”

1. Small Business Role in California’s Economy. California's dominance in many economic areas is based, in part, on the significant role small businesses play in the State's $2.2 trillion economy. According to a 2015 U.S. Small Business Administration report, California’s small businesses employed half of the state’s private workforce in 2012 (6.5 million employees). According to the U.S. Census Bureau, small businesses made up 99.2 percent of all employers in the state for the same year.

In difficult economic times, smaller-sized businesses often function as economic engines. The trend continued in the recession with the number of non-employer firms increasing from 2.6 million firms with $137 billion in revenues in 2008 to 2.8 million firms with $138 billion in revenues in 2010. In the post-recession economy, small businesses are expected to become increasingly important due to their ability to be more flexible and better suited to meet niche market needs. 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 throughout the California economy. Their small size, however, results in certain challenges in meeting regulatory requirements, accessing capital, and marketing their goods and services. Due to the benefits small businesses provide the California economy, the State has historically attempted to mitigate these challenges with government assistance. California's network of technical assistance providers assist businesses with a range of services, including access to quality training, one-on-one counseling, mentoring, marketing data, and other business development resources.

1. Contracting Impediments for Small Businesses. This bill addresses one of small businesses' key challenges in participating in State procurement opportunities: obtaining a surety bond. Obtaining a surety bond is a basic requirement for construction related contracts with public entities. The Miller Act under federal law and the Little Miller Act under state law require contractors on most public works construction projects to post bonds guaranteeing both the performance of their contractual duties and the payment of their subcontractors, workers, and material suppliers. These types of bonds serve as a safeguard to the public entity by ensuring compensation and/or the completion of a project.

Structurally, the surety bond is a three party agreement between the contractor, who is mandated to provide the bond; the project owner, the party protected by the bond; and the surety-insurance company, who writes the bond. There are a variety of surety bonds, but each type shares a common purpose: guaranteeing a contractual obligation to the project owner. For example, a performance bond will guarantee an obligation is met in accordance with the plans and specifications, while a supply bond guarantees that ordered materials will be delivered. Overall, surety bonds can be instrumental in limiting the risk of selecting a bidder. Reducing these risks ultimately aids the owner in reducing the cost of borrowing money to finance the project.

Implementation of this bill would assist emerging contractors by providing an early assessment of the firm's strengths and weaknesses. Based on the assessment, a technical assistance provider would work with the contractor to address deficiencies and then assist the contractor in negotiating the terms of the surety bonds. In some cases, a surety guarantee could be used to enhance the position of the business before the surety bond issuer.

1. GO-Biz and Current Small Business Assistance. In April 2010, Governor Schwarzenegger issued Executive Order S-05-10 as a means to create the Governor's Office of Economic Development (GOED). In October 2011, the Governor signed AB 29 (John A. Pérez, Chapter 475, Statutes of 2011), which effectively codified GOED and changed its name to GO-Biz. Since its inception, the office has served thousands of businesses, 95 percent of which are small. The most frequent types of assistance include help with permit streamlining, starting a business, relocation and expansion of businesses, and regulatory challenges.

In March 2012, Governor Brown initiated a reorganization process to realign the State's administrative structure. Key changes included dismantling of the Business, Transportation and Housing Agency (BTH) and the shifting of a number of key programs to GO-Biz including the Small Business Loan Guarantee Program (SBLGP), the California Travel and Tourism Commission, the California Film Commission, the Film California First Program, and I-Bank. As part of this restructuring, AB 1247 (Medina, Chapter 537, Statutes of 2013) placed the Program’s authority, the SBLGP, and other programmatic authority under I-Bank within GO-Biz. The California Small Business Finance Center is the governmental unit within I-Bank with the administrative responsibility for small business loan and small business bond guarantees.

While the SBLGP is currently operative, the small business surety bond guarantee program has not been sufficiently funded since it was placed under I-Bank and is therefore inoperative.

1. Federal Surety Guarantee. The United States Small Business Administration (SBA) offers a surety bond guarantee program for small and emerging contractors that cannot otherwise obtain surety bonds through regular commercial channels. The SBA guarantee covers contracts up to $2 million. A contractor applying for an SBA surety guarantee must qualify as a small business, in addition to meeting specific eligibility criteria for surety bonding.
2. Prior Related Legislation. AB 1247 (Medina, Chapter 537, Statutes of 2013) enacted the Small Business Financial Assistance Act, transferred the administration of the small business financial development corporation managed programs from the BTH to I-Bank within GO-Biz, and clarified a number of programmatic elements to improve program delivery.

AB 2523 (Hueso) of 2012 would have authorized I-Bank to enter into participation and syndication loan agreements with financial institutions for the purpose of expanding capital opportunities for small businesses. (Status: This bill was held in Senate Appropriations Committee.)

AB 2619 (Pérez) of 2012 would have established the Start-Up California Impact Investment Venture Fund Program, administered through I-Bank, for the purpose of providing equity investments to start-ups and small businesses. (Status: This bill was held in Assembly Appropriations Committee.)

AB 29 (Pérez, Chapter 475, Statutes of 2011) established GO-Biz within the Governor's Office to serve as the lead entity for economic strategy and marketing of California on issues relating to business development, private sector investment, and economic growth.

AB 2376 (Price, Chapter 458, Statutes of 2008) authorized the establishment of the Small and Emerging Contractors Technical Assistance Program, administered by the California Department of Transportation, for the purpose of providing small and emerging contractors with the technical assistance necessary to obtain surety bond guarantees offered by the SBA. The program was repealed on January 1, 2013.

AB 1695 (Bass) of 2007 would have activated the Surety Bond Guarantee Account, administered by the Small Business Loan Guarantee Program, for the purpose of providing surety bond guarantees for small businesses that provide services on state and federally funded transportation projects. (Status: This bill was held under submission in the Assembly Committee on Appropriations.)

1. Arguments in Support. Supporters of the bill cite that this measure would enable small and diverse businesses the opportunity to work on projects such as High Speed Rail, water and highway infrastructure, and other development within the State. They note that, with appropriate support, small contractors can be competitive. When given the opportunity, small contractors expand bidding pools (lowering project costs overall), hire local workers, and successfully complete construction work that contributes to the economy.

SUPPORT AND OPPOSITION:

Support:

All Bay Area Glass

Asian American Contractors Association

Association of Financial Development Corporations

Bayfish Creative Management

CFR & Associates

FCI Management

Fresno Metro Black Chamber of Commerce

Greater Los Angeles African American Chamber of Commerce

GSF Enterprises, Inc.

Mantis Builders

Max Out, Inc.

National Association of Minority Contractors of Southern California

Net Electric

POMS and Associates Insurance Brokers, LLC

RMA Contractors and Consultants, Inc.

San Diego General Contracting

SCORE Greater Los Angeles

Servitek Solutions

Value Fire Protection, Inc.

William Osgood, President the Los Angeles Chapter of the Disabled Veterans Alliance

Opposition:

None on file as of June 21, 2016.

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:

Author:(Bonta)

As Amended Ver:May 27, 2016

2/3 vote

SUMMARY: Modifies an existing statewide surety bond guarantee program for small contractors at the Small Business Finance Center, located within the California Infrastructure and Economic Development Bank (IBank). Specifically, this bill:

1. Expands and adds specificity to an existing small business contractor program, which offers surety bond guarantees to help businesses in obtaining surety bonds through the private market.
2. Specifically identifies disadvantaged business enterprises as an eligible applicant. Current law authorizes any small business contractor, including, but not limited to, women, minority, and disabled veteran businesses.
3. Authorizes the IBank to establish one or more pilot projects before adopting guidelines for a statewide program.
4. Authorizes the IBank to assign all or part of the program to another state entity, however, the IBank retains responsibility for reporting on the use and outcomes of the program.
5. Authorizes the IBank to establish new contractor relationships for the purpose of implementing this program, as specified.
6. Requires the existing surety bond guarantee program include technical assistance, as follows:
   1. Assessment and identification of the particular barriers facing the participating contractor and development of solutions to those barriers, as specified.
   2. Identification of, and assistance in obtaining, other financial support and resources, as specified.

EXISTING LAW:

1. Establishes the IBank within the Governor's Office of Business and Economic Development (GO-Biz) and authorizes it to undertake a variety of financial activities including, but not limited to, the administration of a revolving loan fund, oversight of the Small Business Finance Center, and the issuance of tax-exempt and taxable revenue bonds. The Small Business Finance Center is authorized to provide a range of financial products, including:
   1. Loan guarantees and other credit enhancements;
   2. Direct loans and other debt instruments;
   3. Disaster loan guarantees; and
   4. Surety bond guarantees.
2. Defines a small business, for the purpose of being eligible for state small business procurement contract bid preferences, as independently owned, not dominant in its field of operation, domiciled in California, employing 100 or fewer employees, and earning $10 million or less in average annual gross revenues for the three previous years.
3. Defines a DVBE, for the purpose of being eligible for state procurement, as an entity meeting all of the following requirements:
   1. The legal structure of the business is a:
      1. Sole proprietorship with at least 51% owned by one or more disabled veterans;
      2. Publicly owned business with at least 51% of its stock unconditionally owned by one or more disabled veterans;
      3. Subsidiary that is wholly owned by a parent corporation, but only if at least 51% of the voting stock of the parent corporation is unconditionally owned by one or more disabled veterans; or
      4. Joint venture in which at least 51% of the joint venture's management, control, and earnings are held by one or more disabled veterans.
   2. A disabled veteran is a veteran of the military, naval, or air service of the U.S. who has a service-connected disability of at least 10% and who is domiciled in the state.
   3. The management and control of the daily business operations are by one or more disabled veterans. The disabled veterans who exercise management and control are not required to be the same disabled veterans as the owners of the business.
   4. It has a home office located in the United States, which is not a branch or subsidiary of a foreign corporation, foreign firm, or other foreign-based business.

FISCAL EFFECT: According to the Assembly Appropriations Committee, implementation of the bill will result in: 1) Ongoing General Fund costs of approximately $1.1 million. These costs represent $150,000 for one staff loan officer at the IBank and $861,000 for the IBank to contract with the Financial Development Corporations to administer the program and provide statewide technical assistance. 2) The analysis also states that there will be a need for a one-time General Fund appropriation of at least $10 million in order to guarantee the surety bonds.

COMMENTS: Small businesses play an essential role within the California economy, contributing the most net new jobs, offering an alternative to un- and underemployment, and helping to disburse the financial advantages of the state's globally connected economy. State procurement opportunities represent an important economic tool to support small business development. In the last 15 report periods, the state has met the 25% small business procurement participation goal only five times including the 2013-14 fiscal year.

This measure proposes the establishment of a contractor development program to assist businesses in accessing surety bonds. With enhanced technical assistance, and the option of utilizing a surety bond guarantee, small businesses, DVBEs, and disadvantaged businesses should be able to more successfully compete for state infrastructure-related contracts. The Assembly version of the 2016-17 Budget includes funding for the capitalization of this program.

Removing Contracting Impediments: Small and emerging contractors face a variety of challenges in participating in state procurement opportunities. This bill addresses one of small businesses' key challenges, that of being able to obtain a surety bond; a basic requirement for construction-related contracts with public entities.

The Miller Act, under federal law, and the Little Miller Act, under state law, requires contractors on most public works construction projects to post bonds guaranteeing both the performance of their contractual duties and the payment of their subcontractors, workers, and material suppliers. These types of bonds serve as a safeguard to the public entity by ensuring compensation and/or the completion of a project. In some cases, the surety company is obligated to find another contractor to complete the contract or compensate the project owner for the financial loss incurred.

Structurally, the surety bond is a three party agreement between the contractor, who is mandated to provide the bond; the project owner, the party protected by the bond; and the surety-insurance company, who writes the bond. There are a variety of surety bonds, but each type shares a common purpose of guaranteeing a contractual obligation to the project owner. For example, a performance bond will guarantee an obligation is met in accordance with the plans and specifications, while a supply bond guarantees that ordered materials will be delivered as agreed upon. Overall, surety bonds can be instrumental in limiting the risk of selecting a bidder; namely the risk of the project not being completed or that a contractor's unpaid creditors might place a lien on the project. Reducing these risks ultimately aids the owner in reducing the cost of borrowing money to finance the project.

Implementation of this bill would assist emerging contractors by providing an early assessment of the firm's strengths and weaknesses. Based on the assessment, a technical assistance provider would work with the contractor to address deficiencies and then assist the contractor in negotiating the terms of the surety bonds. In some cases, a surety guarantee could be used to enhance the position of the business before the surety bond issuer. By providing technical assistance and collateral support for small construction businesses, the proposed program would positively benefit the contractor, as well as the project owner, the prime contractor, and prospective workers.

Over the next five years, the author contends that the state will initiate over $50 billion in construction projects related to transportation and community services including health care, education, courts, and recreation. These construction projects represent excellent business opportunities for small businesses, Disabled Veteran Business Enterprises, and disadvantaged businesses. However, without assistance in obtaining surety bonds, many of these opportunities could go unexplored.

Analysis Prepared by: Toni Symonds / J., E.D., & E. / (916) 319-2090 FN: 0003192

Date of Hearing: April 27, 2016

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 2270

Author:(Bonta) – As Amended Ver:April 6, 2016

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill expands the existing authority of the California Infrastructure and Economic Development Bank (I-Bank) to maintain a surety bond program. Specifically, this bill:

1. Prohibits a corporation from guaranteeing a surety bond unless it is determined there is a low probability that a financial institution or private bonding company would grant a bond and the beneficiary demonstrates reasonable prospect of project completion.
2. Expands those entities for which a corporation may act as a guarantor on a surety bond to include disadvantaged business enterprise contractors.
3. Requires the I-Bank to provide technical assistance to contractors, including, assessments by surety and construction experts; business plan development; workshops addressing contractor bonding, bidding, job safety, and other topics that would be beneficial to the participating contractor; identification of, and assistance in obtaining, other financial support and resources.
4. Authorizes the I-Bank to do the following with regard to implementing a surety bond program:
   1. Assign all or part of the surety program to another state entity that agrees to implement the program consistent with this bill and directives and requirements adopted by the bank. If the I-Bank assigns all or a part of the program to another state entity, the bank continues to be responsible for reporting on the use and outcomes of the program.
   2. Establish one or more pilot projects before approving directives and guidelines for a statewide surety bond and small contractor assistance program.
   3. Establish one or more non-state contracts, to the extent deemed necessary by the I-Bank, based on there being an insufficient number of corporations interested in, and qualified to, implement a surety bond program, including the provision of technical assistance. Requires these contractors to be subject to the applicable reporting requirements of this bill and any other directive or requirement set by the I-Bank

FISCAL EFFECT:

1. Ongoing General Fund costs of approximately $1.1 million for the I-Bank to administer the program. These costs represent $150,000 for one staff loan officer at the I-Bank and $861,000 for I-Bank to contract with the Financial Development Corporations (FDCs) to administer the program and provide statewide technical assistance. This arrangement is similar to the General Fund support the I-Bank receives to administer the Small Business Loan Guarantee Program (SBLGP).
2. One-time General Fund appropriation of at least $10 million in order to guarantee the surety bonds. As a point of comparison, the state dedicates $30 million to support the SBLGP.

COMMENTS:

1. Purpose. A surety bond is a three-party financial agreement between a surety, the contractor, and the project owner, in this case the state. The agreement binds the contractor to comply with the terms and conditions of a contract. If the contractor is unable to successfully perform the contract, the surety institution assumes the contractor's responsibilities and completes the project.

According to the author, bonding is difficult for small contractors to obtain. This bill is intended to help small, disadvantaged, women, minority and disabled-veteran–owned (“target”) business contractors overcome the bonding barrier and in turn sustainably grow their businesses. By providing technical assistance and collateral support for small construction businesses hampered by lack of access to bonding, the author states this bill will positively benefit participating contractors, as well as the state agencies, prime contractors, prospective workers they will employ and the general economy.

1. Federal surety guarantee. The federal Small Business Administration (SBA) offers a surety bond guarantee program for small and emerging contractors that cannot otherwise obtain surety bonds through regular commercial channels. The SBA guarantee covers contracts up to $2 million. A contractor applying for an SBA surety guarantee must qualify as a small business, in addition to meeting specific eligibility criteria for surety bonding.
2. Comments. The Governor’s Office of Business and Economic Development (GO-Biz) oversees the I-Bank which administers the California Small Business Finance Center. The California Small Business Finance Center administers programs to assist businesses seeking new capital resources, including, but not limited to, the SBLGP. The state currently has the authority to operate a surety bond guarantee program through the Small Business Center at the I-Bank, but the bank does not currently offer these guarantees. Funding for technical assistance and collateral capitalization would be needed for the I-Bank to provide these services.
3. Prior legislation.
   1. AB 484 (Gipson) of 2015, proposed to authorize the Small Business Finance Center, administered through the I-Bank, to include insurance, coinsurance, and other forms of surety among the types of financial products included in programs administered by the I-Bank. This bill was held on the Suspense file in this committee.
   2. AB 1695 (Bass) of 2007 proposed to activate the Surety Bond Guarantee Account, administered by the Small Business Loan Guarantee Program, for the purpose of providing surety bond guarantees for small businesses that provide services on state and federally funded transportation projects. This bill was held on the Suspense file in this committee.

Analysis Prepared by: Misty Feusahrens / APPR. / (916) 319-2081

Date of Hearing: April 5, 2016

ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT, AND THE ECONOMY

Eduardo Garcia, Chair

ABPCA Bill Id:AB 2270 (

Author:Bonta) – As Introduced Ver:February 18, 2016

SUBJECT: Statewide bonding and contractor assistance program

SUMMARY: Establishes a statewide contractor assistance program for the purpose of helping participating contractors to meet applicable bid, payment, and performance bonding requirements for public contracts with state agencies, as specified. Specifically, this bill:

1. Establishes the Statewide Contractor Bonding Program (Program) for the purpose of assisting participating contractors to meet applicable bid, payment, or performance bonding requirements for public contracts with state agencies.
2. Specifies that the program will be administered through the Office of the Small Business and Disabled Veteran Business Enterprise Services (Office), located within the Department of General Services (DGS).
3. Authorizes the Office to act as a guarantor on a surety bond for a participating contractor on a contract with a state agency.
4. Requires the Office to establish a request for proposals process by which contractors may participate in the Program and requires a preference to be given to any of the following:
   1. A disadvantaged business enterprise, as defined;
   2. A certified small business enterprise; and
   3. A certified disabled veteran business enterprise (DVBE), as defined.
5. Authorizes the Office to terminate a contractor’s participation in the program after a reasonable period of time if the contractor is no longer in compliance with the requirements of the Program.
6. Authorizes the Office to suspend a participating contractor that defaults on a bond from transacting any business with the state either directly as a prime contractor or indirectly as a subcontractor, for a period of not less than three years and not more than 10 years. A suspended contractor is required to receive Office approval before resuming participation in the Program.
7. Authorizes the Office to provide technical assistance to a participating contractor. Required technical assistance includes, but is not limited to, all of the following:
   1. Assessment and identification of the particular barriers facing the participating contractor and development of solutions to those barriers. Activities may include the following:
      1. Assessments by surety and construction experts;
      2. Development of a business plan;
      3. Project field support; and
      4. Workshops addressing the following topics:
         1. Basic information pertaining to contractor bonding;
         2. Understanding the surety process and underwriting;
         3. The process for bidding on state projects;
         4. Addressing stop notices;
         5. Strategies for accessing capital;
         6. Prevailing wages;
         7. Job safety and the Occupational Safety and Health Administration;
         8. Certification; and
         9. Any other topics that would be beneficial to the participating contractor.
   2. Identification of and assistance in obtaining other financial support and resources. Activities may include the following:
      1. Linkages with accountants, brokers, and surety companies committed to helping contractors build bonding and organizational capacity;
      2. Pre-qualifications for additional assistance; and
      3. Collateral guarantees.
   3. Monitoring and reporting on the progress of the participating contractor to the Office, including reporting on the following:
      1. Collaboration with other programs;
      2. Progress on any project for which a bond is issued pursuant to this article;
      3. Defaults on a bond issued pursuant to this article; and
      4. Funds administration. The bill prohibits the Office from charging a fee for services related to monitoring and reporting on funds administration.
8. Requires DGS to adopt the rules and regulations necessary to implement this Program.
9. Authorizes the Office to charge a participation fee to cover the costs of administering the Program, excluding the funds of administration monitoring and reporting, as noted above.
10. Authorizes a contractor to use the surety bond issued by the Office as proof of having performance and payment bonds.

EXISTING LAW:

1. Declares it is state policy that small business and microbusiness receive a fair portion of the total purchases and contracts or subcontracts for state goods, services, information technology, and construction.
2. Establishes the Office within DGS for the purpose of:
   1. Compiling and maintaining a comprehensive bidders list of qualified small businesses and disabled veteran business enterprises;
   2. Coordinating with the Federal Small Business Administration, the Minority Business Development Agency, and the Office of Small Business Development of the Department of Economic and Business Development;
   3. Providing technical and managerial aids to small businesses, microbusinesses, and disabled veteran business enterprises, by conducting workshops on matters in connection with government procurement and contracting;
   4. Assisting small businesses, microbusinesses, and DVBEs, in complying with the procedures for bidding on state contracts; and
   5. Working with appropriate state, federal, local, and private organizations and business enterprises in disseminating information on bidding procedures and opportunities available to small businesses, microbusinesses, and disabled veteran business enterprises.
3. Defines a small business, for the purpose of being eligible for state small business procurement contract bid preferences, as independently owned, not dominant in its field of operation, domiciled in California, employing 100 or fewer employees, and earning $10 million or less in average annual gross revenues for the three previous years.
4. Defines a DVBE, for the purpose of being eligible for state procurement, as an entity meeting all of the following requirements:
   • 1. The legal structure of the business is a:
        1. Sole proprietorship with at least 51% owned by one or more disabled veterans;
        2. Publicly owned business with at least 51% of its stock unconditionally owned by one or more disabled veterans;
        3. Subsidiary that is wholly owned by a parent corporation, but only if at least 51% of the voting stock of the parent corporation is unconditionally owned by one or more disabled veterans; or
        4. Joint venture in which at least 51% of the joint venture’s management, control, and earnings are held by one or more disabled veterans.
     2. A disabled veteran is a veteran of the military, naval, or air service of the U.S. who has a service-connected disability of at least 10% and who is domiciled in the state.
     3. The management and control of the daily business operations are by one or more disabled veterans. The disabled veterans who exercise management and control are not required to be the same disabled veterans as the owners of the business.
     4. It has a home office located in the United States, which is not a branch or subsidiary of a foreign corporation, foreign firm, or other foreign-based business.
5. Establishes the I-Bank within the Governor's Office of Business and Economic Development (GO-Biz) and authorizes it to undertake a variety of financial activities including, but not limited to, the administration of a revolving loan fund, oversight of the Small Business Finance Center, and the issuance of tax-exempt and taxable revenue bonds.
6. Establishes the Small Business Finance Center within the I-Bank for the purpose of assisting businesses seeking capital resources not otherwise available in the private markets including:
   1. Loan guarantees and other credit enhancements;
   2. Direct loans and other debt instruments;
   3. Disaster loan guarantees; and
   4. Surety bond guarantees.

FISCAL EFFECT: Unknown

POLICY ISSUE FRAME

Small businesses play an essential role within the California economy, contributing the most net new jobs, offering an alternative to un- and underemployment, and helping to disburse the financial advantages of the state's globally connected economy. State procurement opportunities represent an important economic tool to support small business development. In the last 15 report periods, the state has met the 25% small business procurement participation goal only five times including the 2013-14 fiscal year.

This measure proposes the establishment of a contractor development program to assist businesses in accessing surety bonds. With enhanced technical assistance, and the option of utilizing a surety bond guarantee, small businesses, DVBEs, and disadvantaged businesses should be able to more successfully compete for state infrastructure-related contracts. The analysis includes background on surety bonds, small businesses role in the California economy, small business and DVBE participation in state contracting, and a former state small business contractor program, which addressed similar needs. Amendments are discussed in Comment #7.

COMMENTS:

1. Small and Emerging Contractor Challenges: Small and emerging contractors face a variety of challenges in participating in state procurement opportunities. This bill addresses one of small businesses' key challenges, that of being able to obtain a surety bond; a basic requirement for construction-related contracts with public entities.

Other challenges include the high cost of purchasing liability insurance, limited opportunities to develop new relationships with experienced prime contractors, and having the in-house technical and administrative skills to comply with state and federal accounting and reporting practices. The increasing practice by state agencies to issue contracts that exceed $1 million in value, particularly in the area of state highway construction, also places a unique burden on small contractors.

1. Removing Contracting Impediments: The Miller Act, under federal law, and the Little Miller Act, under state law, require contractors on most public works construction projects to post bonds guaranteeing both the performance of their contractual duties and the payment of their subcontractors, workers, and material suppliers. These types of bonds serve as a safeguard to the public entity by ensuring compensation and/or the completion of a project. In some cases, the surety company is obligated to find another contractor to complete the contract or compensate the project owner for the financial loss incurred.

Structurally, the surety bond is a three party agreement between the contractor, who is mandated to provide the bond; the project owner, the party protected by the bond; and the surety-insurance company, who writes the bond. There are a variety of surety bonds, but each type shares a common purpose of guaranteeing a contractual obligation to the project owner. For example, a performance bond will guarantee an obligation is met in accordance with the plans and specifications, while a supply bond guarantees that ordered materials will be delivered as agreed upon. Overall, surety bonds can be instrumental in limiting the risk of selecting a bidder; namely the risk of the project not being completed or that a contractor’s unpaid creditors might place a lien on the project. Reducing these risks ultimately aids the owner in reducing the cost of borrowing money to finance the project.

Implementation of AB 2270 would assist emerging contractors by providing an early assessment of the firm's strengths and weaknesses. Based on the assessment, a technical assistance provider would work with the contractor to address deficiencies and then assist the contractor in negotiating the terms of the surety bonds. In some cases, a surety guarantee could be used to enhance the position of the business before the surety bond issuer. By providing technical assistance and collateral support for small construction businesses, the proposed program would positively benefit the contractor, as well as the project owner, the prime contractor, and prospective workers.

Over the next five years, the author contends that the state will initiative over $50 billion in construction projects related to transportation and community services including health care, education, courts, and recreation. These construction projects represent excellent business opportunities for small businesses, DVBEs, and disadvantaged businesses. However, without assistance in obtaining surety bonds, many of these opportunities could go unexplored.

1. The Role of Small Businesses within the California Economy: California's dominance in many economic areas is based, in part, on the significant role small businesses play in the state's $2.3 trillion economy. Two separate studies, one by the U.S. Census Bureau and another by the Kaufman Foundation, found that net job growth was strongest among businesses with less than 20 employees. Among other advantages, small businesses are crucial in the state's international competitiveness and are an important means for dispersing the positive economic impacts of trade within the California economy.

Nonemployer firms make up the single largest component of businesses in California, 2.9 million out of an estimated 3.6 million firms in 2012, representing over $149 billion in revenues with highest number of businesses in the professional, scientific, and technical services industry sector. As these non-employer businesses grow, they continue to serve as an important component of California's dynamic economy. Excluding nonemployer firms, businesses with less than 20 employees comprise nearly 90% of all businesses and employ approximately 18% of all workers. These non-employer and small employer firms create jobs, generate taxes, and revitalize communities.

In hard economic times, smaller size businesses often function as economic engines. In this most recent recession the trend continued, with the number of nonemployer firms increasing from 2.6 million firms ($137 billion in revenues) for 2008 to 2.8 million firms ($138 billion in revenues) for 2010. In the post-recession economy, small businesses are expected to become increasingly important due to their ability to be more flexible and better suited to meet niche market needs. Their small size, however, results in certain challenges in meeting regulatory requirements, accessing capital, competing for large-size contracts and marketing their goods and services.

1. Small Business Procurement Act: The Small Business Procurement Act, administered through DGS, was implemented more than 30 years ago to establish a small business preference within the state's procurement process that would increase the number of contracts between the state and small businesses. A DBVE component was added in 1989. Today, approximately 90% of DVBEs have dual certification as a small business or microbusiness.

The Small Business Procurement Act states that it is the policy of the State of California that the state aid the interests of small businesses in order to preserve free competitive enterprise and to ensure that a fair portion of the total purchases and contracts of the state be placed with these enterprises. The statute further states that DVBE participation is strongly encouraged to address the special needs of disabled veterans seeking rehabilitation and training through entrepreneurship, and to recognize the sacrifices of California's disabled military veterans. Statute sets an annual 3% DVBE participation goal, and a 2010 executive order sets a 25% goal for small businesses and microbusinesses.

The charts below show small business and microbusiness aggregate procurement participation rates for fiscal years 2011-12, 2012-13, and 2013-14 for mandatory reporting agencies (including Caltrans).

Unfortunately, participation rates have not been as high as desired, with state agencies meeting the 25% small business goal in only five out of the last 15 report years. Further, in comparing year to year numbers, it is important to note that not all of the mandatory reporting agencies provide annual data to DGS for inclusion in the report. As an example, only 80% of the mandatory reporters provided data for 2013-14.

1. Increasing Small Business and DVBE Procurement Participation: Every year, Members of the Legislature introduce a range of bills to improve outreach and increase targeted preferences to increase small business participation in state contracting. Over the years, direct and innovative approaches have been added including mandating small business and DVBE liaisons at every agency, establishing official state-level Small Business and DVBE Advocates, and requiring the state join a national on-line contracting platform (BidSync), which is soon to be transferred back to a state-only web platform (F$SCAL).

Among other challenges is the high concentration of contracting within a few departments including several which bid contracts for specialized services. According to the 2013-14 Statewide Consolidated Annual Report, by DGS, the top 10 contracting agencies awarded more than 83% of contract dollars in 2013-14. The data suggests that having department specific strategies to increase small business participation will be required to consistently meet the 25% goal.

In 2013-14, 61% of all state contracts were awarded by the Department of Corrections (SDCR), the Department of Transportation, and the Department of Health Care Services (DHCS). This means that regardless of the efforts of the California School Finance Authority (88.04% of the $99.677 contracts awarded) and California Transportation Commission (89.44% of the $14,291 in contracts awarded), the state's largest contracting entities must do a better job of contracting with small businesses and microbusiness if the state is going to consistently meet its mission of offering small businesses meaningful procurement opportunities. The chart below shows information on the contracting activities of the top 10 contracting departments for 2013-14.

In 2013-14, as shown above, DHCS contracted with small business for only 2.36% of its contracting activities. In fact, the Health and Human Services Agency had the lowest overall small business and microbusiness participation rates (20.285) among all other agencies in the state. If California is going to meet and exceed its small business and DVBE goals, high contract volume agencies like Department of Transportation will need to substantially exceed the 25% and 3% targets.

1. Small and Emerging Contractors Technical Assistance Program: After several failed attempts to provide assistance to small business in accessing surety bonds, the Legislature successfully passed, and the Governor signed AB 2376 (Price) Chapter 458, Statutes of 2008. This measure established the Small and Emerging Contractors Technical Assistance Program (SECTAP) through the California Department of Transportation. Under the SECTAP, Caltrans offered training and technical assistance to small contractors to improve their ability to secure surety bonds. Collateral support, in the form of a surety guarantee, was provided through the federal Small Business Administration (described below). The SECTAP was repealed under its own terms in January 2013. Statute required annual reporting by the Department of Transportation, but committee staff was unable to locate any report.

AB 2270 proposes a similar model to the SECTAP, this time using a state guarantee to help the contractor access surety bonds. The bill proposes establishing a new surety bond guarantee program; the I-Bank, however, has existing surety bond guarantee authority, which is described below.

Federal Surety Bond Guarantee: The Small Business Administration (SBA) offers a surety bond guarantee program for small and emerging contractors that cannot otherwise obtain surety bonds through regular commercial channels. The SBA guarantee covers contracts up to $2 million.

A surety bond is a three-party financial agreement between a surety, the contractor, and the project owner, in this case the state. The agreement binds the contractor to comply with the terms and conditions of a contract. If the contractor is unable to successfully perform the contract, the surety institution assumes the contractor's responsibilities and completes the project. The SBA surety guarantee program covers four types of contract bonds:

• Bids – bonds that guarantee that the bidder on a contract will enter into the contract and furnish the required payment and performance bonds;
• Payment – bonds that guarantee the payment of the contractor's workers and materials;
• Performance – bonds that guarantee the contractor will perform the contract in accordance with its terms; and,
• Ancillary – bonds that are incidental and essential to the performance of the contract.

A contractor applying for an SBA surety guarantee must qualify as a small business, in addition to meeting specific eligibility criteria for surety bonding.

State Surety Bond Guarantee Program: Given the importance of surety bonds to small business contractors, including primes and subcontractors, the state also has authority to operate a surety bond guarantee program through the Small Business Center at the I-Bank. Qualifying small business contractors are required to demonstrate to following:

• There is a low probability that the surety bond would be granted by a financial institution or financial company under reasonable terms or conditions, and the beneficiary has demonstrated a reasonable prospect of successful completion of the project.
• The surety bond will be used for a project in this state.
• The beneficiary has a minimum equity interest in the business as determined by the directives and requirements.
• As a result of the surety bond, the jobs generated or retained demonstrate reasonable conformance to the directives and requirements specifying employment criteria.

The Small Business Finance Center is not currently offering surety bond guarantees. With funding for technical assistance and collateral capitalization, the I-Bank provides this new contractor development program.

1. Suggested Amendments: The Committee may wish to consider whether the state requires another surety bond guarantee program operated by DGS, or whether the existing I-Bank program should be activated.
2. Related Legislation: Below is a list of the related bills.
   1. AB 1247 (Medina and Bocanegra) Small Business Finance Center: This bill establishes the California Small Business Finance Center at the I-Bank, within the Governor’s Office and Economic Development, and transfers the authority to administer the small business loan guarantee program, direct disaster loans, surety bond guarantees, and other related programs to the I-Bank. Status: Signed by the Governor, Chapter 537, Statutes of 2013.
   2. AB 1491 (Arambula) Small and Emerging Contractors Technical Assistance Program: This bill establishes the Small and Emerging Contractors Technical Assistance Program, administered by the California Department of Transportation, to provide small contractors with technical assistance and training to improve their knowledge and skills necessary to secure surety bonds required for public works contracting and assist them in participating in state-awarded construction contracts. Status: JEDE-related content removed, 2007.
   3. AB 1695 (Bass) Capitalize Surety Bond Guarantee program: This bill capitalizes and activates the Surety Bond Guarantee Account, administered by the Small Business Loan Guarantee Program, for the purpose of providing surety bond guarantees for small businesses that provide services on state and federally funded transportation projects. Status: Held under submission in the Assembly Committee on Appropriations, 2007.
   4. AB 2376 (Price): Emerging Contractors Technical Assistance Program: This bill authorizes the establishment of the Small and Emerging Contractors Technical Assistance Program, administered by the California Department of Transportation, for the purpose of providing small and emerging contractors with the technical assistance necessary to obtain surety bond guarantees offered by the federal Small Business Administration. The program is repealed on January 1, 2013. Status: Signed by the Governor, Chapter 458, Statutes of 2008.
3. Double Referral: This measure has been double referred to the Assembly Committee on Jobs, Economic Development, and the Economy and the Assembly Committee on Accountability and Administrative Review (AAR). Should this measure pass JEDE, it will be referred to AAR for further policy consideration.

REGISTERED SUPPORT / OPPOSITION:

Support

None Received

Opposition

None Received

Analysis Prepared by: Toni Symonds / J., E.D., & E. / (916) 319-2090