BILL ANALYSIS
AB 1431
Page 1
Date of Hearing: April 17, 2007
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
Juan Arambula, Chair
AB 1431 (Arambula) - As Introduced: February 23, 2007
SUBJECT : Early stage investment guarantee program.
SUMMARY : Establishes the Early Stage Investment Guarantee
Program (Early Stage Program), administered through the
California Infrastructure and Economic Development Bank
(I-Bank), for the purpose of assisting small businesses in
attracting investors during the early years of their companies
growth. Specifically, this bill :
1)Makes legislative findings that California needs to stimulate
private investment in historically underserved communities and
in women-owned and minority owned businesses. These
businesses represent the fastest growing segment of all other
businesses.
2)Establishes the Early Stage Program for the purpose of making
loan guarantees to businesses with less than 50 employees and
have annual gross revenues of less than $5 million.
3)Require an eligible business provide the I-Bank with
sufficient information to demonstrate:
a) The funds will be used to exercise an investment
agreement that was entered into more than five years
earlier;
b) The loan amount is not greater than the amount of the
initial investment;
c) The loan amount removes all financial obligations of the
business to the investor; and;
d) The business is credit worthy, has the ability to repay
the loan, and meets other financial criteria as determined
by the I-Bank.
4)Authorizes the I-Bank to charge a fee to cover the
administrative costs of the Early Stage Program.
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5)Requires the I-Bank to report annually to the Legislature on
the activities of the Early Stage Program, including the
number and types of businesses that have been assisted and the
number of people employed by those businesses.
EXISTING LAW :
1)Establishes the I-Bank, within Business Transportation and
Housing Agency (BT&H), to issue tax-exempt and taxable revenue
bonds, including industrial development revenue bonds, to
provide below market financing to certain private businesses
and public agencies.
2)Establishes the SBLGP, within BT&H, for the purpose of
providing small businesses with guarantees on loans issued by
a private lender. The program is administered through a
network of local financial development corporations.
FISCAL EFFECT : Unknown
COMMENTS :
1)Purpose of the bill : The author maintains California has the
ability to do a better job of encouraging private investment
in California's historically underserved capital markets, also
known as EDMs. This bill provides an important new tool for
small businesses, many of which are woman and minority owned,
to attract early stage private investors.
2)California's economy : California is the eighth largest
economy in the world, with a gross state product of over $1.7
trillion. The state's significance in the global marketplace
results from a variety of factors, including: its strategic
west coast location, providing direct access to the growing
markets in Asia; its diverse regional economies; its large,
ethnically diverse population, representing both a ready
workforce and significant consumer base; its access to a wide
variety of venture and other private capital; its broad base
of small- and medium-sized businesses; and, its culture of
innovation and entrepreneurship, particularly in the area of
high technology.
The state's economy is not dominated by a single industry;
rather it is comprised of a variety of industry clusters
throughout the state. California's largest industry sectors
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are trade, transportation, and utilities, which encompass
major retail outlets, import-export businesses,
transportation, and warehousing. The state leads the nation
in export-related jobs. Other major nongovernmental
industries include professional and business services,
educational and health services, and manufacturing.
Microenterprises exist in almost every industry cluster. In
many industry clusters, these firms are essential partners for
larger firms, performing specialized services and functions.
Small businesses form the core of California's $1.7 trillion
economy, comprising more than 90% of all businesses, and
responsible for employing more than 50% of all workers in the
state. California's 2.6 million microenterprises (88% of all
businesses) are responsible for creating jobs, generating
taxes and revitalizing communities. Microenterprises employed
over 19% of all workers in California in 2003. In 2002, the
most recent data available, microenterprises generated $238
billion in taxable revenues. Common types of microenterprises
include engineering, computer system design, housekeeping,
construction, landscaping, and personnel services.
3)Emerging domestic markets : The term EDM refers to people,
places, or business enterprises with growth potential that
face capital constraints due to systematic undervaluation as a
result of imperfect market information. These markets include
ethnic- and women-owned firms, urban and rural communities,
companies which serve low-to-moderate-income populations, and
other small- and medium sized businesses.
EDMs are driven by demographic trends that are occurring in
the United States (U.S.) marketplace. The population of the
U.S. is expected to increase by 131 million by 2050, a
majority of which will be among minorities. Minority
purchasing power currently accounts for 33% of the total
purchasing power in California and 20% of the nation.
Purchasing power of minority consumers in the U.S. is expected
to triple from $1.3 trillion in 2000 to over $4 trillion in
2045, representing over 70% of the total growth in U.S.
purchasing power. If minority purchasing power were counted
as a single economy, the purchasing power of U.S. minority
groups would constitute the 6th largest economy in the world.
California is well positioned to meet the demands of the
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growing minority marketplace. More than 34% of the nation's
minority-owned firms are based in California and,
minority-owned firms are surpassing the growth of all
businesses. A Milken Institute study found that
minority-owned firms are growing at a rate of 17% per year,
six times the growth rate of all other firms and those sales
from minority firms is growing 34% per year, more than twice
the rate of all other firms.
However, while the growth of minority businesses is greater
than majority owned firms in number and sales, they remain
severely restrained by a lack of access to capital. As an
example, in 1999, total assets in U.S. private equity markets
was estimated at $95 billion; however, only $2 billion was
managed by companies whose focus was supplying capital to
entrepreneurs from traditionally underserved markets. Further
exacerbating the problem, the Milken Institute reports that
Latinos and African Americans are turned down for business
loans at three times the rate of whites with equivalent credit
characteristics.
Increasing investments in minority-owned businesses and within
minority communities is likely to be key to the future
economic health of California, as well as, its business
community. The loan guarantees provided by AB 1431 could help
in overcoming some of these systemic challenges minority and
women owned businesses encounter in growing their business.
4)Attracting private investment to EDMs : In March of 2007, the
Assembly Committee on Jobs, Economic Development, and the
Economy (JEDE) and the Budget Subcommittee 4 on State
Administration held a joint hearing to examine the state's
workforce investment and economic development programs. A copy
of the white paper prepared for the hearing, California's
Economic Development Programs: Meeting the Challenges of
Today's Economy, may be found at www.assembly.ca.gov under the
JEDE in the Committee Directory.
More specifically, the hearing focused on whether the state
had the optimal mix of policies, programs, and services to
meet the current and near-future economic challenges facing
California particularly relative to EDMs, cleantech, and
manufacturing. The nation's two largest public pension funds,
the California Public Employees Retirement System (CalPERS)
and the California State Teachers Retirement Systems
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(CalSTRS), testified on their own EDM programs and why their
Boards of Directors had approved investment policies to
specifically direct investments in previously underserved
areas.
Besides approving EDM investment policies for specific asset
classes, CalPERS and CalSTRS have each established a goal of
investing 2% of their systems' assets from all asset classes
(public equities, fixed income, private equity, and real
estate) in the emerging portions of the state. In working
toward this goal, both funds still require all investments be
made on an opportunistic basis (only make investments if they
are deemed beneficial) and that all investments meet
appropriate risk-adjusted returns to the system. As of
December 31, 2006, CalSTRS' exposure in California's
underserved and emerging markets was $2.3 billion (or 1.6% of
the fund). The one year increase in CalSTRS investments in
EDMs, was $364 million, an (18%) increase over the previous
year.
Although both CalPERS and CalSTRS are national leaders in EDM
investing, there are particular types of deals that have been
challenging to fit within their current investment programs -
particularly early stage investments in small to medium sized
companies.
For the past several years, the California Hispanic Chambers
of Commerce has focused its efforts upon improving the
opportunities for minority and women-owned firms to acquire
private equity investments, particularly early stage
investments of between $2 and 11 million depending on the
industry sector. At the national level, The New America
Alliance has been a leader in developing strategies for
pension fund managers to invest in women and minority owned
firms. AB 1431 was developed in consultation with these
organizations and the private equity investors on their boards
of directors.
5)Author's amendments : Staff understands the author will
present amendments to shift the administration of the program
from the I-Bank to the Small Business Loan Guarantee Program.
6)Related legislation : Below is a list of legislation
introduced in the Assembly this session relating to EDMs.
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a) AB 232 (Price) : This bill establishes a pilot project
to implement and then measure the effectiveness of locally
developed community action plans. Status: Assigned to the
Assembly Committee on Jobs, Economic Development, and the
Economy.
b) AB 1606 (Arambula) : This bill, among other items,
requires the development of a state strategy to attract
private investment to the state, including specific
opportunities for encouraging investment in EDMs. Status:
Assigned to the Assembly Committee on Jobs, Economic
Development, and the Economy on April 17, 2007.
REGISTERED SUPPORT / OPPOSITION :
Support
California Hispanic Chambers of Commerce
Sustainable Capitol
Opposition
None on file
Analysis Prepared by : Toni Symonds / J., E.D. & E. / (916)
319-2090