Existing law, the Small Business Financial Assistance Act of 2013, establishes the California Small Business Expansion Fund, a continuously appropriated fund that includes General Fund moneys. The act requires guarantees made by small business financial development corporations to be backed by funds on deposit in the corporations trust fund account or by receivables due from funds loaned from the corporations trust fund account to another fund in state government, as specified, and requires these loan guarantees to be secured by a reserve of at least 20%, until January 1, 2018, and 25% thereafter, as specified.

This bill would reduce the required reserve to 10% indefinitely and would make conforming changes with respect to related statements of legislative intent.

Existing law prohibits the amount of guarantee liability outstanding at any one time from exceeding 5 times the amount of funds on deposit in the expansion fund plus any receivables due from funds loaned from the expansion fund to another fund in state government, as specified, until January 1, 2018, and 4 times thereafter.

This bill would increase that maximum amount to 10 times the amount of funds on deposit in the expansion fund plus any receivables due from funds loaned from the expansion fund to another fund in state government, as specified, would apply that increased amount indefinitely, and would make conforming changes.

Existing law requires the program manager under the guidance of the executive director of the California Infrastructure and Economic Development Bank, to, among other things, authorize the distribution, transfer, and withholding of moneys in the expansion fund and trust funds.

This bill would also require the program manager to leverage moneys in the expansion fund and trust funds.

Existing law, the Small Business Financial Assistance Act of 2013, establishes the California Small Business Expansion Fund, a continuously appropriated fund that includes General Fund moneys. The act requires guarantees made by small business financial development corporations to be backed by funds on deposit in the corporations trust fund account or by receivables due from funds loaned from the corporations trust fund account to another fund in state government, as specified, and requires these loan guarantees to be secured by a reserve of at least 20%, until January 1, 2018, and 25% thereafter, as specified.

This bill would reduce the required reserve to 10% indefinitely and would make conforming changes with respect to related statements of legislative intent.

Existing law prohibits the amount of guarantee liability outstanding at any one time from exceeding 5 times the amount of funds on deposit in the expansion fund plus any receivables due from funds loaned from the expansion fund to another fund in state government, as specified, until January 1, 2018, and 4 times thereafter.

This bill would increase that maximum amount to 10 times the amount of funds on deposit in the expansion fund plus any receivables due from funds loaned from the expansion fund to another fund in state government, as specified, would apply that increased amount indefinitely, and would make conforming changes.

Existing law requires the program manager under the guidance of the executive director of the California Infrastructure and Economic Development Bank, to, among other things, authorize the distribution, transfer, and withholding of moneys in the expansion fund and trust funds.

This bill would also require the program manager to leverage moneys in the expansion fund and trust funds.

Existing law, the Small Business Financial Assistance Act of 2013, establishes the California Small Business Expansion Fund, a continuously appropriated fund that includes General Fund moneys. The act requires guarantees made by small business financial development corporations to be backed by funds on deposit in the corporations trust fund account or by receivables due from funds loaned from the corporations trust fund account to another fund in state government, as specified, and requires these loan guarantees to be secured by a reserve of at least 20%, until January 1, 2018, and 25% thereafter, as specified.

This bill would reduce the required reserve to 10% indefinitely and would make conforming changes with respect to related statements of legislative intent.

Existing law prohibits the amount of guarantee liability outstanding at any one time from exceeding 5 times the amount of funds on deposit in the expansion fund plus any receivables due from funds loaned from the expansion fund to another fund in state government as, government, as specified, until January 1, 2018, and 4 times thereafter.

This bill would increase that maximum amount to 10 times the amount of funds on deposit in the expansion fund plus any receivables due from funds loaned from the expansion fund to another fund in state government as, government, as specified, would apply that increased amount indefinitely, and would make conforming changes.

Existing law, the Small Business Financial Assistance Act of 2013, establishes the California Small Business Expansion Fund, a continuously appropriated fund that includes General Fund moneys. The act requires guarantees made by small business financial development corporations to be backed by funds on deposit in the corporations trust fund account or by receivables due from funds loaned from the corporations trust fund account to another fund in state government, as specified, and requires these loan guarantees to be secured by a reserve of at least 20%, until January 1, 2018, and 25% thereafter, as specified.

This bill would reduce the required reserve to 10% indefinitely and would make conforming changes with respect to related statements of legislative intent.

Existing law prohibits the amount of guarantee liability outstanding at any one time from exceeding 5 times the amount of funds on deposit in the expansion fund plus any receivables due from funds loaned from the expansion fund to another fund in state government as, specified, until January 1, 2018, and 4 times thereafter.

This bill would increase that maximum amount to 10 times the amount of funds on deposit in the expansion fund plus any receivables due from funds loaned from the expansion fund to another fund in state government as, specified, would apply that increased amount indefinitely, and would make conforming changes.

Existing law, the Small Business Financial Assistance Act of 2013, establishes the California Small Business Expansion Fund, a continuously appropriated fund that includes General Fund moneys. The act requires guarantees made by small business financial development corporations to be backed by funds on deposit in the corporations trust fund account or by receivables due from funds loaned from the corporations trust fund account to another fund in state government, as specified, and requires these loan guarantees to be secured by a reserve of at least 20%, until January 1, 2018, and 25% thereafter, as specified.

This bill would reduce the required reserve to 10% indefinitely and would make conforming changes with respect to related statements of legislative intent.

Existing law, the Small Business Financial Assistance Act of 2013, establishes the California Small Business Expansion Fund, a continuously appropriated fund that includes General Fund moneys. The act requires guarantees made by small business financial development corporations to be backed by funds on deposit in the corporations trust fund account or by receivables due from funds loaned from the corporations trust fund account to another fund in state government, as specified, and requires these loan guarantees to be secured by a reserve of at least 20%, until January 1, 2018, and 25% thereafter, as specified.

This bill would reduce the required reserve to 10% indefinitely and would make conforming changes with respect to related statements of legislative intent.

 UNFINISHED BUSINESS  

Bill No: SB 936

Author:

:

Vote:

SENATE BUS., PROF. & ECON. DEV. COMMITTEE: 9-0, 4/11/16

AYES: Hill, Bates, Berryhill, Block, Galgiani, Hernandez, Jackson, Mendoza, Wieckowski

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

SENATE FLOOR: 39-0, 4/21/16 (Consent)

AYES: Allen, Anderson, Bates, Beall, Berryhill, Block, Cannella, De León, Fuller, Gaines, Galgiani, Glazer, Hall, Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Moorlach, Morrell, Nguyen, Nielsen, Pan, Pavley, Roth, Stone, Vidak, Wieckowski, Wolk

NO VOTE RECORDED: Runner

ASSEMBLY FLOOR: 78-0, 8/11/16 (Consent) - See last page for vote

SUBJECT:

SOURCE: California Infrastructure and Economic Development Bank

Governor’s Office of Business and Economic Development

DIGEST: This bill reduces the required reserve leverage ratio of the California Small Business Expansion Fund (Fund), which funds the California Small Business Loan Guarantee Program (SBLGP), from 20 percent to 10 percent.

Assembly Amendments correct a drafting error and add, to the program manager’s list of responsibilities, that he or she is responsible for authorizing the leverage of moneys in the Fund.

ANALYSIS:

Existing law:

1. Establishes the Governor’s Office of Business and Economic Development (GO-Biz), which is administered by a director appointed by the Governor for the purpose of serving 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 Expansion Fund (Fund); authorizes the approval of certain small business financial development corporations (FDCs) to act as intermediaries between the state, small business, and financial institution in administering loan guarantees; requires the loan guarantees made under the Fund to be backed by money on deposit or by receivables due from funds loaned from the expansion fund. (GC §§ 63088 – 63089.98)
3. Specifies the reserve leverage ratio of the Fund at 20 percent and will increase that ratio to 25 percent on January 1, 2018. (GC §§ 63089.5 – 63089.62)

This bill:

1. Decreases the required reserve for purposes of backing loan guarantees under the Fund from 20 percent to 10 percent and removes a sunset on this provision, thereby making it permanent.
2. Increases the maximum amount of liability outstanding at any one time in the Fund from five to ten times the amount of funds on deposit, plus any receivables due from funds loaned from the expansion fund to another fund in state government.

Background

GO-Biz is the sponsor of this bill. GO-Biz administers the SBLGP, which provides guarantees to commercial lenders for loans issued to business owners that otherwise would not qualify, such as low- to moderate-income individuals. Current law requires 20 percent of each dollar of a loan guarantee to be set aside on reserve in the Fund. After January 1, 2018, the minimum reserve is scheduled to increase to 25 percent.

This bill will reduce the current reserve level from 20 percent to 10 percent. GO-Biz is seeking this change to make more funds available to lend to small businesses. GO-Biz believes the current loan loss reserve percentage of 20 and the maximum amount required on deposit in the Fund is overly conservative. For the 2015-16 fiscal year, the SBLGP had losses of less than one percent and historically the SBLGP has never endured losses over 5.5 percent. The reserve level change will also bring the SBLGP ratio in line with the federal ten percent ratio requirement for the federal State Small Business Credit Initiative.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Assembly Appropriations Committee this bill will result in “minor/absorbable costs to the Governor's Office of Business and Economic Development (GO-Biz) to administer program changes to the SBLGP.”

SUPPORT: (Verified 8/11/16)

California Infrastructure and Economic Development Bank (co-source)

Governor’s Office of Business and Economic Development (co-source)

Association of Financial Development Corporations

California Asian Pacific Chamber of Commerce

California Association for Local Economic Development

California Association for Micro Enterprise Opportunity

California Association of Independent Business

California Bankers Association

California Black Chamber of Commerce

California City Economic Development Corporation

California Chamber of Commerce

California Coastal Rural Development Corporation

California Community Banking Network

California Capital Financial Development Corporation

California Small Business Association

California Southern Small Business Development Corporation

City of Dublin

City of Fountain Valley

City of Long Beach

City of Sacramento

Northern California Small Business Financial Development Corporation

Orange County Business Council

Pacific Coast Regional Small Business Development Corporation

San Gabriel Valley Economic Partnership

San Jose Silicon Valley Chamber of Commerce

Silicon Valley Economic Development Alliance

Small Business California

Small Business Development Corporation of Orange County

Small Business Majority, California

Solano Economic Development Corporation

Southwest California Legislative Council

Stanislaus Business Development Center

Sun Village Park Association

Superior California Economic Development

Tuolumne County Economic Development Authority

Valley Small Business Development Corporation

OPPOSITION: (Verified 8/11/16)

None received

ARGUMENTS IN SUPPORT: Supporters state that the bill allows GO-Biz to help more small businesses by providing additional lending capacity under the SBLGP. They argue that, while the reserve account protects lenders against losses, the SBLGP has a promising track record with losses on federal funds less than one percent since 2011.

Prepared by:

8/12/16 13:24:01

**** END ****

Date of Hearing: August 3, 2016

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

SBPCA Bill Id:SB 936

Author:(Hertzberg) – As Amended Ver:June 29, 2016

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

SUMMARY:

This bill makes changes to the California Small Business Expansion Fund (Expansion Fund) under the Small Business Loan Guarantee Program (SBLGP). Specifically, this bill:

1. Decreases the required reserve for purposes of backing loan guarantees under the Expansion Fund from 20 percent to 10 percent and removes a sunset on this provision, thereby making it permanent.
2. Increases the maximum amount of liability outstanding at any one time in the Expansion Fund from five to ten times the amount of funds on deposit, plus any receivables due from funds loaned from the expansion fund to another fund in state government.

FISCAL EFFECT:

Minor/absorbable costs to the Governor's Office of Business and Economic Development (GO-Biz) to administer program changes to the SBLGP.

COMMENTS:

1. Purpose. The Governor’s Office of Business and Economic Development (GO-Biz) administers the Small Business Loan Guarantee Program (SBLGP) which provides guarantees to commercial lenders for loans issued to business owners that otherwise would not qualify, such as low- to moderate-income individuals. Current law requires 20% of each dollar of a loan guarantee to be set aside on reserve in the Expansion Fund. After January 1, 2018, the minimum reserve is scheduled to increase to 25%.

This bill, sponsored by GO-Biz, will reduce the current reserve level from 20% to 10%. GO-Biz is seeking this change to make more funds available to lend to small businesses. GO-Biz believes the current loan loss reserve percentage of 20 and the maximum amount required on deposit in the Expansion Fund is overly conservative.  For the 2015-15 fiscal year, the SBLGP had losses of less than 1% and historically the SBLGP has never endured losses over 5.5%. The reserve level change will also bring the SBLGP ratio in line with the federal 10% ratio requirement for the federal State Small Business Credit Initiative (SSBCI).

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

Date of Hearing: June 21, 2016

ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT, AND THE ECONOMY

Eduardo Garcia, Chair

SBPCA Bill Id:SB 936

Author:(Hertzberg) – As Amended Ver:June 2, 2016

SENATE VOTE: 39-0

SUBJECT: California Small Business Expansion Fund: corporate guarantees

SUMMARY: Provides for the increased leverage of moneys assigned to secure loan guarantees under the Small Business Loan Guarantee Program (SBLGP).

1. Increases the maximum amount of guarantee liability outstanding at any one time in the California Small Business Expansion Fund (Expansion Fund) from five to 10 times the amount of funds on deposit, plus any receivables due from funds loaned from the expansion fund to another fund in state government.
2. Lowers the minimum reserves from 20% to 10% of the value of outstanding loan guarantees attributed to an individual account of a small business financial development corporation (FDC). Existing law authorizes the program manager to set a higher leverage ratio, as necessary.
3. Removes the January 1, 2018, sunset on the minimum reserve amount, thereby making the provisions in this bill permanent.

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.
2. Establishes the Small Business Finance Center within the IBank 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.
3. Establishes the SBLGP for the purpose of assisting small businesses obtain long term loans or lines of credit from conventional and non-traditional financial institutions, which the small businesses would not otherwise qualify for without the guarantee. Under this program, FDCs act as financial intermediaries between the state, the small business, and the financial institution.
4. Establishes the Expansion Fund for the purpose of retaining the moneys which capitalize the SBLGP The state has no guarantee obligation beyond the amount of moneys deposited within the Expansion Fund. Until January 1, 2018, a reserve of at least 20% of the value of the guaranteed amount is required to be on deposit in the Expansion Fund. After January 1, 2018, the minimum reserve is increased to 25%.
5. Authorizes the program manager to establish one or more accounts in the Expansion Fund for FDCs participating in one or more programs Small Business Finance Center programs.
6. Specifies that each account in the Expansion fund is a legally separate account. Funds in one account are prohibited from being used to satisfy loan guarantees or other financial product obligations of another FDC, as specified.

FISCAL EFFECT: Unknown

POLICY ISSUE FRAME:

California offers a range of financial assistance to small businesses. One of the largest programs is the SBLGP, which is administered through the Small Business Finance Center at the IBank. Moneys to capitalize the program are deposited in the Expansion Fund and are available to make payouts on defaulted loans. The state has no legal obligation to make payouts beyond the moneys within the Expansion Fund. Until January 1, 2018, a reserves of at least 20% of the value of the guaranteed amount is required to be on deposit in the Expansion Fund. After January 1, 2018, the reserve amount is scheduled to be increased to 25%.

This bill permanently lowers the minimum reserve amount to 10%. In considering the appropriateness of this change, it is important to recognize that the statutory limits are not necessarily the operational limits of the program. Within the statutory limits, the program manager is responsible for setting the reserve ratio for the overall program, as well as for the individual accounts of the FDCs. The advantage in lowering the minimum reserve is that additional guarantees may be issued for small business loans throughout the state. The analysis includes additional information on the IBank, the SBLGP, and related legislation. An amendment is suggested in Comment 6.

COMMENTS:

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 $2.4 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 and development within the California economy.

Nonemployer firms make up the single largest component of businesses in California, 2.9 million out of an estimated 3.8 million firms in 2013, with the highest number of businesses (515,814) 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 over 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 3.1 million firms ($162.4 billion in revenues) for 2014. 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. Background on the I-Bank: The IBank was established in 1994 to promote economic revitalization, enable future development, and encourage a healthy climate for jobs in California. Housed within GO-Biz, it is governed by a five-member board of directors comprised of the Director of GO-Biz (chair), the State Treasurer, the Director Department of Finance, the Transportation Agency, and a Governor’s appointee. The day-to-day operations of the IBank 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 IBank has authority for 25 staff members.

The IBank 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 most recent Comprehensive Annual Financial Report, its programs continue to provide revenues sufficient to cover operating expenses.

The IBank administers four primary programs: (1) the Infrastructure State Revolving Fund which provides direct low-cost financing to public agencies for a variety of public infrastructure projects; (2) the Conduit Bond Program which provides financing for manufacturing companies, public benefit nonprofit organizations, public agencies and other eligible entities; (3) the California Lending for Energy and Environmental Needs (CLEEN) Center; and (4) the Small Business Finance Center which helps small businesses access private financing through loan guarantees, direct loans, and performance bond guarantees. There is no commitment of I-Bank or state funds for any of the conduit revenue bonds. Even in the case of default, the state is not liable.

Since its creation in 1994, the IBank has loaned, financed, or participated in over $34 billion in infrastructure and economic expansion projects. This includes over $400 million to local and state agencies, developing a high-level of expertise in the financing of public infrastructure. The IBank also serves as the state's only general purpose financing authority with broad statutory powers to issue revenue bonds, make loans, and provide guarantees. Over $33 billion in conduit revenue bonds have been issued by the IBank since 2000.

1. The Small Business Finance Center: The Small Business Finance Center was established pursuant to AB 1247 (Medina and Bocanegra), Chapter 537, Statutes of 2013. In addition, to transferring the SBLGP from the soon to be defunct Business, Transportation and Housing Agency, the bill modernized the state's delivery of small business finance, which included providing greater program flexibility and authority to the IBank Board. Development of AB 1247 was a collaborative effort between the JEDE Committee, GO-Biz, and the IBank.

The SBLGP is locally administered through nine FDCs, which review and approve state-backed guarantees on loans made through private lending institutions. In order to qualify for financial assistance under the SBLGP, a business must be able to demonstrate that they are not able to access private financing without the use of the guarantee.

In 2011, California received significant federal funding through the State Small Business Credit Initiative (SSBIC), a program established under the federal Small Business Jobs Act. Under the federal funding formula, California received $168 million, which is the largest amount of any state. The next highest award was $97 million for Florida, with every state that applies receiving a minimum of $13.1 million. One-half of California's moneys are being used to capitalize a second and slightly modified SBLGP that reflects the nuisances of the federal requirements.

Since receiving the federal funds, the priority of the SBLG Program has been to use the federal funds, rather than the state guarantee funds. In 2014-15, the state guarantee was exclusively used for renewals within the portfolio and for guarantees that were not eligible under the federal requirements. In FY 2014-15, 124 loans ($37.4 million) were guaranteed using $21.1 million in state funds. Borrowers reported that 2,813 jobs were created or retained under the state-side of the SBLGP.

In fiscal year 2014-15, 252 guarantees were made for a total of $130 million in loans using $92.8 million of federal State Small Business Credit Initiative funds. Borrowers reported that 11,781 jobs were created or retained.

1. Default Rates: The SBLGP is over 30 years old and has been overseen by a range of state entities. Its historically low default rate is a testament to the diligence and skill of the FDCs who provide both technical and financial assistance to the small businesses they serve.

In 2007, legislation was enacted to lower the reserve amount from 25% to 20%. [AB 610 (Price), Chapter 601, Statues of 2007] In the years prior to change, the SBLGP had a default rate at or below traditional lenders: 0.25% in 2005-06 and 0.10% in 2004-05. The five-year default rate in 2005-06 was 0.79%. The default rate for the comparable portfolio of the Small Business Administration is 3.5% to 5%.

Even in the challenging economic times of the great recession, the SBLGP had very limited defaults, as shown in the chart below.

1. The Need for Active Management of Underserved Areas and Supporting Underserved Population Groups: California has benefited greatly from the additional federal funding for SBLGP activities. Prior to receiving these funds, the state program was struggling to scale up after being effectively shut down in 2009 and 2010. The federal funding not only provided new capital, but more importantly ensured that the FDCs had an ongoing source of capital on which to build programs and hire financial professionals to meet the needs of small businesses within their regions.

Given California's growing income inequality, resources such as the SBLGP offer the state a rare opportunity to counter this disturbing econmic trend. Research shows that net new job growth is actually strongest among businesses with less than 20 employees and that entrepreneurial activity often serves as a catalyst for building economic stability within communities, neighborhoods, and individual households.

The 2012 Survey of Business Owners, published by U.S. Census Bureau, offers additional data as to the important role that businesses can play in dispersing economic benefits among underrepresented groups. Among other findings, the data shows a 27.5% increase in women-owned businesses between 2007 and 2012, as compared to a 7.9% increase in businesses owned by men. Women-owned businesses also experienced the greatest increase in the number of people they employed and wages paid. Chart 1 displays data on the growth of business ownership during the report period for selected groups.

The SBLGP annually reports on a number of financial elements, including defaults, as well as the race/ethnicity, and gender of borrowers. Beginning in 2017, the annual report will also include data on geographic location of businesses served. [AB 1537 (JEDE), Chapter 191, Statutes of 2015]

Of the 376 loans guaranteed in 2014-15 using the federal and state funds, 64.63% were male, 17.02% were women, and 18.35% were co-owned by men and women. The race/ethnicity of the owners of the small businesses assisted: Caucasian 62.77%; Asian/Pacific Islander 8.51%; Hispanic 9.31%; African American 3.19%; Asian Indian 4.52%; and Native American 0.80%.

Comparing the 2014-15 loan guarantees to the overall make-up of California businesses (Chart 2), shows that, overall, the ownership of businesses accessing the SBLGP during the report period was more heavily comprised of businesses owned by white males. The percentage of businesses equally co-owned, whoever, was twice the state average, 18.35% v. 8.8%.

While there are many factors that contribute to making a program accessible to small businesses, these comparative reviews do suggest that the IBank specifically engage with FDCs on what actions they have taken and will take in the future to serve a more representative group of businesses.

Encouraging the active management of the SBLGP is an important duty of the program manager and existing law provides him or her with key tools by which to accomplish this responsibility. First, each FDC has a statutory duty to undertake program activities that provide outreach to low-resource small businesses and microbusineses and to partner with other financial and community partners to accomplish this duty, GC§ 63088.6. Second, existing law also requires each FDC to submit an annual written plan of operation to the program manager, which should encompass all of its contractual duties, GC §63089.1. Third, the program manager has the authority to distribute and even withhold Expansion Fund moneys to ensure FDCs meet program responsibilities, as outlined in their annual contract, GC §63089.1. Collectively, these duties and responsibilities underscore the fundamental mandate of the program to serve a wide range of small businesses from across the state that have a representative ownership that reflects the diversity of the state.

1. Amendment for the Committee's Consideration: By removing the sunset provisions, the bill eliminates one method by which the public and the Legislature periodically focus on leverage ratios and default rates of the SBLGP. On a going forward basis, it may be appropriate to codify the specific role of the IBank Executive Director in reviewing the setting of loan guarantee reserve ratios with the program manager.
2. Related Legislation: Below is a list of the related bills.
   1. AB 610 (Price): Leverage of the Small Business Expansion Fund: This bill enhances the Small Business Loan Guarantee Program's ability to leverage existing program dollars resulting in the ability to serve more small businesses financial needs per year. More specifically, the bill authorizes a 20% reserve to outstanding loan guarantees rather than a 25% reserve. Status: Signed by the Governor, Chapter 601, Statutes of 2007.
   2. AB 1247 (Medina and Bocanegra) Small Business Finance Center: This bill establishes the California Small Business Finance Center at the IBank, 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.
   3. AB 1537 (Assembly Committee on Jobs, Economic Development, and the Economy) Small Business Finance Center: This bill expands reporting requirements for programs financed through the California Small Business Finance Center by including annual reporting on the general geographic location of assisted businesses. This information is essential to monitoring that small businesses throughout the state have access to these programs. Status: Signed by the Governor, Chapter 191, Statutes of 2015.
   4. AB 2671 (Assembly Committee on Jobs, Economic Development and the Economy) Small Business Access to Capital: This bill extends, until January 1, 2018, the sunset date on the maximum allowable leverage of reserve funds necessary under Small Business Loan Guarantee Program. On January 1, 2013, the maximum leverage rate was scheduled to return to 25% or four dollars for every one dollar of loan guaranteed. This bill allows the program to continue to operate at the 20% reserve limit. The Director of the SBLGP has the discretion to set a lesser leverage amount for the overall program and for any individual small business financial development corporation. Status: Signed by the Governor, Chapter 648, Statutes of 2012.

REGISTERED SUPPORT / OPPOSITION:

Support

California Infrastructure Development Bank (sponsor)

Association of Financial Development Corporations

California Asian Pacific Chamber of Commerce

California Association for Local Economic Development

California Association for Micro Enterprise Opportunity

California Association of Independent Businesses

California Bankers Association

California Black Chamber of Commerce

California Capital Financial Development Corporation

California Chamber of Commerce

California City Economic Development Corporation

California Coastal Rural Development Corporation

California Community Banking Network

California Small Business Association

California Southern Small Business Development Corporation

City of Dublin

City of Fountain Valley

City of Long Beach

City of Sacramento

Northern California Financial Development Corporation

Orange County Business Council

Pacific Coast Regional Development Corporation

San Gabriel Valley Economic Partnership

Silicon Valley Economic Partnership

Small Business California

Small Business Development Corporation of Orange County

Small Business Majority

Solano Economic Development Corporation

Southwest California Legislative Council

Stanislaus Business Development Center

Sun Village park Association

Superior California Economic Development

Tuolumne County Economic Development Corporation

Valley Small Business Development Corporation

Opposition

None Received

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

 CONSENT  

Bill No: SB 936

Author:

:

Vote:

SENATE BUS, PROF. & ECON. DEV. COMMITTEE: 9-0, 4/11/16

AYES: Hill, Bates, Berryhill, Block, Galgiani, Hernandez, Jackson, Mendoza, Wieckowski

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

SUBJECT:

SOURCE: Governor’s Office of Business and Economic Development

California Infrastructure and Development Bank

DIGEST: This bill reduces the required reserve leverage ratio of the California Small Business Expansion Fund, which funds the California Small Business Loan Guarantee Program, from 20 percent to 10 percent.

ANALYSIS:

Existing law:

1. Establishes the Governor’s Office of Business and Economic Development (GO-Biz), which is administered by a director appointed by the Governor for the purpose of serving 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 Expansion Fund (Fund); authorizes the approval of certain small business financial development corporations (FDCs) to act as intermediaries between the state, small business, and financial institution in administering loan guarantees; requires the loan guarantees made under the Fund to be backed by money on deposit or by receivables due from funds loaned from the expansion fund. (GC §§ 63088 – 63089.98)
3. Specifies the reserve leverage ratio of the Fund at 20 percent and will increase that ratio to 25 percent on January 1, 2018. (GC §§ 63089.5 – 63089.62)

This bill:

1. Reduces the reserve leverage ratio required to back loan guarantees made under the Fund, which funds the Small Business Loan Guarantee Program, to 10 percent.
2. Updates several references to the Fund reserve leverage ratio and makes other technical conforming code changes.

Background

GO-Biz is the sponsor of this bill. According to the Author, nearly one-third of small business owners are unable to obtain adequate financing for their companies. The California Small Business Loan Guarantee Program (SBLGP) provides collection guarantees to financial institutions for loans issued to small businesses that otherwise would not qualify for a term loan or line of credit. According to the SBLGP 2014-2015 Annual Report, the SBLGP promotes statewide economic development and allows participating small businesses to secure financing that allows growth and expansion of their business. In addition to assisting small businesses in obtaining an initial loan, the SBLGP in turn also helps small businesses establish credit with a lender, which makes additional future financing without assistance more likely.

Business size eligibility for the SBLGP generally follows the U.S. Small Business Administration 7(a) program guidelines, which vary based on industry. Specific market rate loan terms and interest rates are negotiated between the borrower and the lender. The SBLGP provides guarantees covering up to 80 percent of the loan, but not exceeding $2,500,000.

The State of California was approved for an allocation of $168 million in federal funds from the U.S. Treasury under the State Small Business Credit Initiative (SSBCI); a component of President Obama's Small Business Jobs Act of 2010. The allocation was split between two state agencies, with the SBLGP under
GO-Biz to receive half or $84 million in three disbursements. The SSBCI funds have unique requirements. Consequently, the SSBCI-funded loan guarantees are administered separately as a subset of the SBLGP. Thus, since 2011, the SBLGP has consisted of two subsets: the state-funded portion of the SBLGP program and the federal SSBCI-funded portion.

In FY 2014-15 alone, a total of 252 SSBCI loans were granted resulting in $92.8 million of loan guarantees that supported $130.1 million in small business loans. This guarantee activity contributed to a total of $211,617,415 of overall capital that was injected into California’s small business community. In addition, the borrowers reported 11,781 jobs were created or retained during this period as a result of these loan guarantees. For the federally-funded SSBCI loans, I-Bank paid claims amounting to $40,383 during the FY 2014-15, equivalent to 0.08 percent of the reserve account and 0.02 percent of the over $210 million outstanding principal.

During FY 2014-15, the state-funded program was limited to guarantee loans and renewals within the managed SBLGP portfolio that did not meet the requirements in the federal SSBCI program. In this year, a total of 124 loans were granted resulting in $21.1 million of loan guarantees that supported $37.4 million in small business loans. This guarantee activity contributed to a total of $197,393,686 of overall capital that was injected into California’s small business community. The small business owners reported 2,813 jobs created or retained as a result of these loan guarantees. For fiscal year 2014-2015, I-Bank paid out $457,331 in claims while recovering $164,633 for the state-funded portion of the SBLGP. This resulted in losses of less than one percent in the program on the reserve account and about one-third of a percent of the outstanding principal amount of the loans.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 4/19/16)

Governor’s Office of Business and Economic Development (co-source)

California Infrastructure and Economic Development Bank (co-source)

Association of Financial Development Corporations

California Asian Pacific Chamber of Commerce

California Association for Local Economic Development

California Association for Micro Enterprise Opportunity

California Association of Independent Business

California Bankers Association

California Black Chamber of Commerce

California Capital Financial Development Corporation

California Chamber of Commerce

California City Economic Development Corporation

California Community Banking Network

California Small Business Association

California Southern Small Business Development Corporation

City of Dublin

City of Fountain Valley

City of Long Beach

Mayor and City Council of the City of Sacramento

Northern California Financial Development Corporation

Orange County Business Council

Pacific Coast Regional Small Business Development Corporation

San Gabriel Valley Economic Partnership

Silicon Valley Economic Development Alliance

Small Business California

Small Business Development Corporation of Orange County

Small Business Majority

Solano Economic Development Corporation

Stanislaus Business Development Center

Sun Village Park Association

Superior California Economic Development

Tuolumne County Economic Development Authority

Valley Small Business Development Corporation

OPPOSITION: (Verified 4/19/16)

None received

ARGUMENTS IN SUPPORT: Supporters state that the bill allows GO-Biz to help more small businesses by providing additional lending capacity under the SBLGP. They argue that, while the reserve account protects lenders against losses, the SBLGP has a promising track record with losses on federal funds less than one percent since 2011.

Prepared by:

4/20/16 15:39:01

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SENATE COMMITTEE ON

BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT

Senator Jerry Hill, Chair

2015 - 2016 Regular

Bill No: SB 936 Hearing Date: April 11, 2016

Subject: California Small Business Expansion Fund: corporate guarantees

SUMMARY: Reduces the required reserve leverage ratio of the California Small Business Expansion Fund, which funds the California Small Business Loan Guarantee Program, from 20 percent to 10 percent.

Existing law:

1. Establishes the Governor’s Office of Business and Economic Development (GO-Biz), which is administered by a director appointed by the Governor for the purpose of serving 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 Expansion Fund (Fund); authorizes the approval of certain small business financial development corporations (FDCs) to act as intermediaries between the state, small business, and financial institution in administering loan guarantees; requires the loan guarantees made under the Fund to be backed by money on deposit or by receivables due from funds loaned from the expansion fund. (GC §§ 63088 – 63089.98)
3. Specifies the reserve leverage ratio of the California Small Business Expansion Fund at 20 percent and will increase that ratio to 25 percent on January 1, 2018. (GC §§ 63089.5 – 63089.62)

This bill:

1. Reduces the reserve leverage ratio required to back loan guarantees made under the California Small Business Expansion Fund, which funds the Small Business Loan Guarantee Program (SBLGP), to 10 percent.
2. Updates several references to the Small Business Expansion Fund reserve leverage ratio and makes other technical conforming code changes.

FISCAL EFFECT: Unknown. This bill is keyed “fiscal” by Legislative Counsel.

COMMENTS:

1. Purpose. The Sponsor of this measure is the Governor’s Office of Business and Economic Development (GO-Biz). According to the Author, nearly one-third of small business owners are unable to obtain adequate financing for their companies. The California Small Business Loan Guarantee Program (SBLGP) provides guarantees to commercial lenders for loans issued to business owners that otherwise would not qualify, such as low- to moderate-income individuals. Current law requires 20 percent of each dollar of a loan guarantee to be set aside in the reserve; that requirement will increase to 25 percent in 2018 – well above the 10 percent minimum required by federal law. The current reserve requirement means fewer loans can be supported and will needlessly tie up valuable lending support capacity at I-Bank. While the reserve account protects lenders against losses, the program has a promising track record. Since 2011, losses on the federal funds amounted to less than one percent of the reserve account. SB 936 decreases the required reserve needed to back loan guarantees made by the SGLGP to 10 percent.
2. Small Business 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 $2.2 trillion economy. 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. According to a 2015 U.S. Small Business Administration report, California has more than 3.6 million small businesses, over 1.2 million more than any other state. The report also noted that 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. Their small size, however, results in certain challenges in meeting regulatory requirements, accessing capital, and marketing their goods and services. 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.
3. Governor's Office of Business and Economic Development (GO-Biz). In February 2010, the Little Hoover Commission undertook a review of the state's economic and workforce development programs. In its final report, Making up for Lost Ground: Creating a Governor's Office of Economic Development, it analyzed the status and effectiveness of current programs since the 2003 demise of the Technology, Trade, and Commerce Agency (TTCA) and recommended the creation of a new governmental entity to fill the void left by the dismantled agency. The report called for a single entity that would promote greater economic development, foster job creation, serve as a policy advisor, and deliver specific services directly to the California business community. In April 2010, Governor Schwarzenegger issued Executive Order S-05-10 as a means to operationalize the report recommendations including the creation of 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 include 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 the Infrastructure and Economic Development Bank (I-Bank). As part of this restructuring, AB 1247 (Medina, Chapter 537, Statutes of 2013) placed the SBLGP under I-Bank within GO-Biz.

The California Small Business Finance Center is the governmental unit within I-Bank with the administrative responsibility for the SBLGP. In May 2015, the directives for the implementation of programs administered under the Small Business Finance Center were adopted by the I-Bank Board pursuant to the Small Business Financial Assistance Act of 2013 (Medina, Chapter 537, Statutes of 2013). The directives and requirements replaced all existing regulations regarding the SBLGP under the Small Business Finance Center pursuant to the law. Additionally, in the 2014-15 fiscal year, I-Bank hired a Chief Compliance Officer to assist with all I-Bank program compliance, including state and federal rules and guidelines governing the SBLGP program.

1. Small Business Loan Guarantee Program. According to the California Small Business Loan Guarantee Program 2014-2015 Annual Report, the SBLGP promotes statewide economic development by providing collection guarantees to financial institutions for loans issued to small businesses that otherwise would not qualify for a term loan or line of credit. As a result of the SBLGP, participating small businesses are able to secure financing that allows growth and expansion of their business. The loan guarantee serves as a credit enhancement and an incentive for financial institutions to make loans to small businesses that otherwise would not be eligible for such financing.

Business size eligibility for the SBLGP generally follows the U.S. Small Business Administration 7(a) program guidelines, which vary based on industry. Specific market rate loan terms and interest rates are negotiated between the borrower and the lender. Proceeds of the loan must be used primarily in California for any standard business purpose applicable to the applicant's business. The SBLGP provides guarantees covering up to 80 percent of the loan, but not exceeding $2,500,000. In addition to assisting small businesses in obtaining an initial loan, the SBLGP in turn also helps small businesses establish credit with a lender, which makes additional future financing without assistance more likely.

The State of California was approved for an allocation of $168 million in federal funds from the U.S. Treasury under the State Small Business Credit Initiative (SSBCI), a component of President Obama's Small Business Jobs Act of 2010. The allocation was split between two state agencies, with the SBLGP under I-Bank to receive half or $84 million in three disbursements. The SSBCI funds have unique requirements. Consequently, the SSBCI-funded loan guarantees are administered separately as a subset of the SBLGP. Thus, since 2011, the SBLGP has consisted of two subsets: the state-funded portion of the SBLGP program and the federal SSBCI-funded portion.

Historically, eleven Financial Development Corporations (FDCs) had contracts with the State to administer guarantees under the state and federal loan guarantee programs. Each FDC is a nonprofit corporation with general responsibilities for: marketing SSBCI and SBLGP, underwriting the loan guarantees, coordinating the loan guarantee documents and/or loan packages, executing and issuing the loan guarantees, and ensuring that lenders follow the required default procedures before requesting payment on defaulted loans. After assessing the effectiveness of the services provided by each FDC, I-Bank offered contracts to nine of the FDCs for
FY 2014-15.

In FY 2014-15 alone, a total of 252 SSBCI loans were granted resulting in $92.8 million of loan guarantees that supported $130.1 million in small business loans. This guarantee activity contributed to a total of $211,617,415 of overall capital that was injected into California’s small business community. In addition, the borrowers reported 11,781 jobs were created or retained during this period as a result of these loan guarantees. For the federally-funded SSBCI loans, I-Bank paid claims amounting to $40,383 during the FY 2014-15, equivalent to 0.08 percent of the reserve account and 0.02 percent of the over $210 million outstanding principal.

During FY 2014-15, the state-funded program was limited to guarantee loans and renewals within the managed SBLGP portfolio that did not meet the requirements in the federal SSBCI program. In this year, a total of 124 loans were granted resulting in $21.1 million of loan guarantees that supported $37.4 million in small business loans. This guarantee activity contributed to a total of $197,393,686 of overall capital that was injected into California’s small business community. The small business owners reported 2,813 jobs created or retained as a result of these loan guarantees. For fiscal year 2014-2015, I-Bank paid out $457,331 in claims while recovering $164,633 for the state-funded portion of the SBLGP. This resulted in losses of less than one percent in the program on the reserve account and about one-third of a percent of the outstanding principal amount of the loans.

1. Prior Related Legislation. AB 201 (Holden, Chapter 529, Statutes of 2013) required the director of the SBLGP to maintain an internet website including information on the programs administered through the statewide network of small business financial development corporations.

AB 780 (Bocanegra) of 2013 would have appropriated $2 million from the General Fund for the purpose of providing administrative funding to the FDCs, made each FDC eligible to receive $150,000, and stated that it is the Legislature's intent that the FDCs are to be under the jurisdiction of GO-Biz Status. (Status: This bill was held in Senate Appropriations Committee.)

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 the I-Bank within GO-Biz, and clarified a number of programmatic elements to improve program delivery.

AB 2523 (Hueso) of 2012 would have authorized the 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 the 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 610 (Price, Chapter 601, Statutes of 2007) limited the amount of guarantee liability under the Small Business Expansion Fund to five times the amount of funds on deposit in the expansion fund or in a corporation’s trust fund account and deleted the provision authorizing the director to allow a corporation to exceed that leverage ratio.

1. Arguments in Support. The Mayor and City Council of the City of Sacramento cite that nearly one-third of small business owners are unable to obtain adequate financing for their company. The SBLGP promotes statewide economic development by providing loan guarantees for business owners that would otherwise not qualify. In the 2014-15 fiscal year, the SBLGP supported 376 loans resulting in $167.5 million in small business loans and creating almost 15,000 jobs in California. Permanently decreasing the loan loss reserve required for the SBLGP from 20 percent to 10 percent would allow even more small businesses to participate.

The Association of Financial Development Corporations supports SB 936 noting that it will help more small businesses by providing additional lending capacity under the SBLGP.

The Northern California FDC stated their belief that passage of SB 936 will further stimulate and revitalize the economy, create jobs, and ensure that there is a reasonable apportionment of funds going to the hardest hit and most economically challenged groups.

The Pacific Coast Regional Small Business Development Corporation argued that, while the reserve account protects lenders against losses, the SBLGP has a promising track record with losses on federal funds less than one percent of the reserve program since 2011.

1. Proposed Technical Author Amendments. The Author has proposed one additional technical amendment to this bill in order to correct the section of
   GC § 63089.62 that was intended to be stricken. This amendment is non-substantive and technical in nature.
   

SUPPORT AND OPPOSITION:

Support:

Governor’s Office of Business and Economic Development (Sponsor)

California Infrastructure and Economic Development Bank (Sponsor)

Association of Financial Development Corporations

California Asian Pacific Chamber of Commerce

California Association for Local Economic Development

California Association for Micro Enterprise Opportunity

California Association of Independent Business

California Bankers Association

California Black Chamber of Commerce

California Capital Financial Development Corporation

California Chamber of Commerce

California City Economic Development Corporation

California Community Banking Network

California Small Business Association

California Southern Small Business Development Corporation

City of Long Beach

Mayor and City Council of the City of Sacramento

Northern California Financial Development Corporation

Orange County Business Council

Pacific Coast Regional Small Business Development Corporation

San Gabriel Valley Economic Partnership

Silicon Valley Economic Development Alliance

Small Business California

Small Business Development Corporation of Orange County

Solano Economic Development Corporation

Sun Village Park Association

Superior California Economic Development

Tuolumne County Economic Development Authority

Valley Small Business Development Corporation

Opposition: None received as of April 5, 2016.

-- END --