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2011

Other Budget Issues

Further Detail

Background. The Small Business Loan Guarantee Program (SBLGP) allows Financial Development Corporations (FDCs), working closely with small business borrowers and local community banks, to issue guarantees on behalf of the state to businesses that would otherwise not be able to secure bank loans. Current state law limits the guaranteed loan amount applied to state funds to a 5 to 1 ratio or less. (In other words, the state funds can only guarantee up to $5 in lending for small businesses for every state dollar committed to the program.) The SBLGP currently has a half-time program manager overseeing FDCs and directing the state’s efforts and one analyst providing day-to-day assistance.

The program’s ability to guarantee loans has declined in recent years because the balance in the Small Business Expansion Fund (SBEF) guaranteeing the small business loans has been reduced from over $40 million in 2006-07 to roughly $24 million in fall of 2010. This balance has been reduced primarily because of transfers to the General Fund as well as increasing loan defaults related to the current economic recession.

In fall 2010, the Governor signed Chapter 731, Statutes of 2010 (AB 1632, Committee on Budget), which provided $20 million to the SBEF to expand the loan guarantee program. Shortly after Chapter 731 was signed into law, the US Congress enacted the State Small Business Credit Initiative Act of 2010. This act established a 7 year program to allocate federal funds to state small business capital access and loan guarantee programs. The SBLGP has been allotted $84 million from this program, which will be disbursed in one-third increments of $28 million. The intent of the program is that one federal dollar would result in new lending to small businesses in a ratio that is at least 10 times the new federal contribution. This leverage ratio is significantly higher than the state’s current practices.

Governor’s 2011-12 Budget Proposal. The 2011-12 January budget proposes to revert the $20 million in General Fund dollars recently appropriated to the SBEF because the program is receiving significant new federal funding. In addition, the administration is requesting an additional one-half position to make the program manager a full position and one analyst to coordinate and comply with federal reporting requirements. The budget also provides roughly $1.7 million General Fund to support FDCs.

 LAO Analysis. The Governor’s proposal to revert $20 million in General Fund dollars provided by Chapter 731 is reasonable. The program will receive nearly four times as much funding from the federal government over the next two years as is currently available. In addition, the reversion of the General Fund dollars will help to resolve the state’s budget problem. Further, we think it may be possible to revert the remaining General Fund dollars (roughly $24 million) in the SBEF over time as a multi-year budget solution. Due to the significant federal funding made available for loan guarantees, we believe this would have little or no negative affect to the program. To accomplish this, as lines of credit come up for renewal and loans terminate, the state funding backing these could be unencumbered and new federal funds used in its place. Once the state monies are no longer encumbered, they could revert to the General Fund. The federal legislation does not explicitly prohibit such action.

The request for an additional .5 managerial position would make the current .5 managerial position a full position. Given the increased activity likely in this program resulting from the increase of federal funds, we believe this request is reasonable. However, the request for the additional analyst position appears unnecessary because of the minor increase in federal reporting requirements. The federal legislation indicates the state must submit two reports (1) a quarterly report indicating the total amount of federal funding used by the state and (2) an annual report that includes general information about the number and amount of new loans originated under the state program. In addition, by increasing the managerial position to a full position it is possible that some workload between the managerial and analyst positions could be reallocated—freeing the current analyst position to perform other duties and reducing the need for a second analyst position.

Historically, the state has provided a subsidy using General Fund dollars to FDCs for administering this program. Using General Fund dollars to provide this subsidy may be unnecessary in the future for a number of reasons. First, FDCs impose a fee on each loan provided to cover part of their administrative costs. The fee is a percentage of the total value of the loan. The revenues that FDCs generate from these types of fees should increase because they will be doing a larger volume of loans and the amount of each loan is likely to be greater than in the past. Second, the larger trust fund balance held by the state will provide roughly an additional $1.6 million annually in interest earnings. These earnings could be used to subsidize FDCs, if a subsidy were still needed, rather than General Fund dollars. Lastly, if additional funding were needed to cover FDCs costs, they could increase the fees they charge to provide these loans to the extent allowed by the state.

LAO Recommendation. We recommend the Legislature adopt the Governor’s January budget proposal to augment SBLGP by $84 million in federal funds and revert $20 million to the General Fund from the program in 2011-12. Further, we recommend adopting trailer bill language that would allow for the reversion of additional General Fund dollars as the lines of credit and loans backed by roughly $24 million in state funds expire. Also, we recommend the Legislature reduce the request for additional staff by one and approve the .5 managerial position. Finally, we recommend the Legislature consider eliminating the $1.7 million General Fund subsidy provided to FDCs.