Issue Brief: Assessing the California Rebuilding Fund

Issue Brief: Assessing the California Rebuilding Fund June 2022 Executive Summary The COVID-19 pandemic had devastating effects on small businesses in California, with minority- and women-owned businesses bearing the brunt of these impacts. In response, the California Rebuilding Fund was launched in Fall 2020 to partner with Community Development Financial Institutions (CDFIs) in providing loans to small businesses as they rebuild and recover from the unprecedented impacts of the pandemic. In its December 2020 report on COVID and small business recovery, the Little Hoover Commission found that the Rebuilding Fund was a notable example of public-private partnership in service of small businesses and urged the Governor and Legislature to build and expand on this model if its initial results were promising. To determine whether the Rebuilding Fund is fulfilling its mission of supporting small businesses in underserved communities, the Commission held a follow-up hearing on the program’s implementation in March 2022. More recently, Commission staff secured updated metrics, reflected in this report, about the Fund’s accomplishments. The Rebuilding Fund has made crucial progress toward its mission, issuing nearly 1,200 loans to businesses in nearly 40 California counties, amounting to $71 million. Of these loans, the majority have gone to the smallest of small businesses as well as diverse business owners: ◊ Over 85 percent of loans have gone to businesses with ten or fewer employees. ◊ More than 65 percent of loans have gone to businesses owned by women or people of color. ◊ Nearly half of loans have gone to businesses located in low-to-moderate income communities. Still, the Rebuilding Fund has faced numerous challenges since its launch in 2020: ◊ California’s focus on and promotion of its small business grant programs has largely overshadowed the Rebuilding Fund’s outreach efforts. ◊ Raising capital for the Fund has been slower than expected due to the unique structure of the program as well as hesitancy from state and private lenders to invest. ◊ Leveraging local funding is an important factor in determining how the program’s funds are distributed, yet only San Francisco and Santa Clara counties have partnered with the Rebuilding Fund to better support businesses in their communities. By providing small businesses the capital they need to rebuild and grow as well as connecting them to critical CDFI supports, the Rebuilding Fund invests in long-term small business recovery, making it a critical complement to the short-lived emergency support provided by the state’s grant programs. We hope this Issue Brief will serve as a resource for state policymakers as they consider ways to promote long-term structural supports for the smallest of small businesses in underserved communities throughout California. Issue Brief: Assessing the California Rebuilding Fund June 2022 Introduction The California Rebuilding Fund was launched in Fall 2020 to provide loans to small businesses as they rebuild and recover from the unprecedented impacts of the COVID-19 pandemic. To determine whether the Rebuilding Fund is fulfilling its mission of supporting small businesses in underserved communities, the Commission held a follow-up hearing on the program’s implementation in March 2022. More recently, Commission staff secured updated metrics, reflected in this report, about the Fund’s accomplishments. The Commission learned that the Rebuilding Fund has made crucial progress toward its mission, issuing nearly 1,200 loans to businesses in 39 California counties, amounting to $71 million. Of these loans, the majority have gone to the smallest of small businesses as well as diverse business owners. Still, the Rebuilding Fund has faced numerous challenges since its launch in 2020, including outreach and awareness, raising capital, and leveraging local funding. California Rebuilding Fund Basics WHAT IS THE REBUILDING FUND? The California Rebuilding Fund is a public-private partnership established in November 2020 that aggregates funding from private, philanthropic, and public sector sources for the purpose of providing loans to the smallest of California’s small businesses as they navigate and recover from the economic impacts of the COVID-19 pandemic.1 Small businesses with 50 or fewer employees and less than $5 million in annual revenue are eligible to apply for a loan of up to $100,000 from the Fund. Loans can be used flexibly for business needs and will be repaid over five years at an interest rate of 4.25 percent, which is below market rate.2 HOW DOES THE REBUILDING FUND WORK? The Rebuilding Fund combines private and public funding and directs it toward community lenders so they can lend at scale to small businesses throughout the state. In order to attract private investment, the Rebuilding Fund uses public dollars as “first-loss capital” (the structure of the Rebuilding Fund is discussed in detail in Appendix A). This means that any losses due to non- repayment of loans are absorbed first by the state’s contribution to the fund. This structure has two advantages: 1. It subsidizes the loans provided to small businesses. Using public contributions as first-loss capital reduces the risk for private investors, allowing them to contribute to the Rebuilding Fund at a lower interest rate, which translates to a lower interest rate for the small business owners taking out loans. 2. It leverages state dollars to expand the size of the fund. By using state dollars to bear the brunt of anticipated defaults and reducing risk for other investors, the Rebuilding Fund encourages private investors to contribute. The Rebuilding Fund’s designers suggested that LITTLE HOOVER COMMISSION WWW.LHC.CA.GOV | 2 Issue Brief: Assessing the California Rebuilding Fund June 2022 an initial state allocation of $37.5 million, together with contributions from local governments, could support a fund of up to $250-500 million.3 The capital the Fund receives from its lenders is then aggregated and used to make loans directly to Community Development Financial Institutions (CDFIs), who then use that capital to provide loans of up to $100,000 to eligible small businesses. CDFIs are private institutions that focus on community development and on serving underserved communities – both urban and rural – by providing credit, financial services, and technical support. Given CDFIs’ experience working with businesses in underserved communities and supporting businesses perceived as “risky” by traditional banks, loaning the Fund’s capital to them directly ensures that “underserved California small businesses in dire need of low-cost loan capital” will be serviced and supported during their time of need.4 Implementation Update As of May 2022, the Rebuilding Fund has made 1,188 small business loans, amounting to $71 million. The average loan is $60,000.5 According to Rebuilding Fund managers, the majority of loans – 68 percent – has gone to businesses owned by women or people of color.6 Additionally, 45 percent of loans have gone to business located in CDFI Investment Areas, a measurement of low-to-moderate income communities.7 A majority of loans have also gone to extremely small businesses. Thirty-two percent of the loans went to sole proprietorships, while 86 percent went to businesses with ten or fewer employees.8 The Rebuilding Fund has made loans to small businesses in 39 counties (see Table 1). Of these, San Francisco is dramatically over-represented, receiving 17 percent of all loans (and over 20 percent of funds distributed – see Table 2) despite housing just 2 percent of California’s population. This amounts to 24 loans per 100,000 residents in San Francisco, by far the highest number of any county that received Rebuilding Fund loans. Other Bay Area counties, including Santa Clara, San Mateo, and Marin, are somewhat over-represented in receiving Rebuilding Fund loans, but not nearly so dramatically as San Francisco. San Francisco’s disproportionate loan rate is the result of a local small business loan program it launched in July 2021 in partnership with the Rebuilding Fund. Known as the Small Business Recovery Loan Fund, this program is administered by the Rebuilding Fund and provides zero- interest loans of up to $100,000 to San Francisco small businesses.9 San Francisco contributed $2 million in funding for loans, and an additional $2 million to enable loans to be offered interest- free.10 Beth Bafford at Calvert Impact Capital – the lead CDFI participating in the Rebuilding Fund – provided insight into the impact of San Francisco’s program: So around 100 of the San Francisco small businesses were able to access 0% loans through LITTLE HOOVER COMMISSION WWW.LHC.CA.GOV | 3 Issue Brief: Assessing the California Rebuilding Fund June 2022 Table 1. Rebuilding Fund Loan Data by County Percentage of County Share of CA Loans per 100,000 County Number of Loans Loans Population Residents 1 Los Angeles 304 25.59% 25.17% 3.08 2 San Francisco 202 17.00% 2.15% 23.97 3 San Diego 112 9.43% 8.39% 3.41 4 Orange 106 8.92% 8.07% 3.35 5 Santa Clara 90 7.58% 4.84% 4.75 6 Riverside 55 4.63% 6.22% 2.26 7 Alameda 48 4.04% 4.22% 2.91 8 San Bernardino 45 3.79% 5.58% 2.06 9 San Mateo 27 2.27% 1.90% 3.63 10 Sacramento 22 1.85% 4.02% 1.40 11 Contra Costa 21 1.77% 2.95% 1.82 12 Sonoma 15 1.26% 1.23% 3.11 13 Fresno 14 1.18% 2.58% 1.38 14 Ventura 13 1.09% 2.13% 1.56 15 Kern 13 1.09% 2.32% 1.43 16 Marin 12 1.01% 0.66% 4.67 17 Santa Barbara 10 0.84% 1.14% 2.25 18 San Joaquin 9 0.76% 2.00% 1.15 19 El Dorado 8 0.67% 0.49% 4.20 20 Placer 8 0.67% 1.04% 1.96 21 Imperial 7 0.59% 0.46% 3.90 22 Solano 5 0.42% 1.14% 1.12 23 Napa 4 0.34% 0.35% 2.94 24 Butte 4 0.34% 0.51% 1.98 25 Tulare 4 0.34% 1.21% 0.84 26 Stanislaus 4 0.34% 1.40% 0.73 27 San Benito 3 0.25% 0.17% * 28 Santa Cruz 3 0.25% 0.68% 1.13 29 San Luis Obispo 3 0.25% 0.72% 1.07 30 Monterey 3 0.25% 1.11% 0.69 31 Mono 2 0.17% 0.03% * 32 Kings 2 0.17% 0.39% 1.32 33 Madera 2 0.17% 0.40% 1.27 34 Yolo 2 0.17% 0.56% 0.90 35 Merced 2 0.17% 0.73% 0.70 36 Mendocino 1 0.08% 0.23% * 37 Tehama 1 0.08% 0.17% * 38 Glenn 1 0.08% 0.07% * 39 Shasta 1 0.08% 0.46% 0.55 Total 1,188 * = County population is under 100,000. Source: Number of loans per county is from Beth Bafford, Vice President, Strategy, Calvert Impact Capital. Personal communication with Commission staff. May 11, 2022. County Share of California population and Loans per 100,000 residents calculated using Department of Finance data. “Population Estimates for Cities, Counties, and the State -- January 1, 2021 and 2022.” May 2022. https://dof.ca.gov/forecasting/demographics/estimates-e1/ LITTLE HOOVER COMMISSION WWW.LHC.CA.GOV | 4 Issue Brief: Assessing the California Rebuilding Fund June 2022 the fund – and the mayor helped market Table 2. Rebuilding Fund Loan it to their community of small business Amounts by County owners. We tried to set up the Rebuilding Fund so it can be leveraged by local Funded Percentage of Total County governments without having to create all Amount Funded Amount new infrastructure each time. So this is an 1 Los Angeles $17,804,759 25.11% example of that in action!”11 2 San Francisco $14,969,255 21.11% 3 Orange $6,531,289 9.21% Santa Clara County took similar action. 4 Santa Clara $5,691,661 8.03% The County Board of Supervisors voted in 5 San Diego $5,328,730 7.51% December 2020 to partner with the Rebuilding 6 Alameda $3,329,883 4.70% Fund by investing $6 million for immediate 7 Riverside $3,022,915 4.26% low-interest loans to Santa Clara small 8 San Bernardino $2,527,790 3.56% businesses.12 9 San Mateo $1,495,150 2.11% 10 Contra Costa $1,442,700 2.03% It appears that since San Francisco and, to 11 Sacramento $860,450 1.21% some extent, Santa Clara, contributed more 12 Fresno $855,503 1.21% financially, these counties were able to 13 Kern $764,905 1.08% draw down a larger share of funds from the 14 Sonoma $742,300 1.05% Rebuilding Fund as a result. 15 Marin $660,500 0.93% 16 Ventura $509,400 0.72% 17 Placer $460,800 0.65% Implementation 18 San Joaquin $405,052 0.57% 19 Santa Barbara $348,900 0.49% Challenges 20 Butte $309,500 0.44% 21 Tulare $267,562 0.38% Although the Rebuilding Fund has issued 22 El Dorado $267,100 0.38% 23 Napa $260,500 0.37% nearly 1,200 loans amounting to $71 million, 24 Solano $251,300 0.35% it seemed probable at the time of the 25 Santa Cruz $233,500 0.33% Commission’s December 2020 report that the 26 San Benito $226,456 0.32% program would generate a larger lendable 27 Imperial $223,840 0.32% amount, with IBank staff reporting that the 28 Stanislaus $212,597 0.30% Fund aimed to raise between $250 and $500 29 Monterey $163,800 0.23% million.13 30 Yolo $155,400 0.22% 31 San Luis Obispo $146,600 0.21% At its Implementation Review Hearing on 32 Merced $110,000 0.16% the Rebuilding Fund in March 2022, the 33 Glenn $100,000 0.14% Commission heard from several small 34 Tehama $100,000 0.14% business experts regarding the challenges the 35 Madera $43,071 0.06% Fund has faced since its launch in Fall 2020. 36 Mono $40,500 0.06% Those challenges, summarized below, explain 37 Kings $34,381 0.05% why the Rebuilding Fund has not raised more 38 Mendocino $10,000 0.01% funds or issued more loans. 39 Shasta $10,000 0.01% Total $70,918,049 Source: Beth Bafford, Vice President, Strategy, Calvert Impact Capital. Personal communication with Commission staff. May 11, 2022. LITTLE HOOVER COMMISSION WWW.LHC.CA.GOV | 5 Issue Brief: Assessing the California Rebuilding Fund June 2022 Outreach and Awareness CHALLENGES TO PROMOTING THE REBUILDING FUND Building awareness about the Rebuilding Fund has been tough. “This incredible tool, with low interest rates and 3-5 year terms, is a secret to many,” noted Hilda Kennedy, founder and President of Am-Pac Business Capital.14 Since its inception in November 2020, the Rebuilding Fund has largely been overshadowed by the widespread availability of small business grants. One week after the launch of the Fund, California initiated its Small Business COVID-19 Relief Grant Program, which ultimately provided more than $4 billion in grants to small businesses across the state. The free capital provided by this grant program “understandably suppressed the number of small business owners who were interested in loans, even with the extremely low interest rate,” explained Scott Wu, Executive Director of IBank. “Promoting a loan fund while significant grant funds have remained available has been difficult,” he added.15 “This incredible tool, with low interest rates and 3-5 year terms, is a secret to many.” - Hilda Kennedy, founder and President of Am-Pac Business Capital High demand for small business grants rather than loans resulted in California focusing its attention on and devoting resources to implementing the Small Business COVID-19 Relief Grant Program rather than the Rebuilding Fund. In response, Fund organizers “intentionally limited active marketing, outreach, and engagement as most [Fund] partners” – including the Governor’s Office, GO-Biz, IBank, and the Office of the Small Business Advocate – “focused on disbursing grants.”16 As a result, the “Rebuilding Fund operated in the background for the majority of 2021,” according to Beth Bafford of Calvert Impact Capital, the lead CDFI of the Fund.17 An additional roadblock to conducting more outreach about the Rebuilding Fund is the fact that CDFIs – who play a crucial role in connecting small businesses throughout California to the Rebuilding Fund – often do not have marketing budgets to promote the services and support they offer small businesses. Even IBank, which provided the anchor investment for the Fund, lacks the budget for promotional efforts. “Unlike many other finance institutions,” Mr. Wu testified, “we don’t have a line item for marketing or outreach and so we don’t have a budget for it. We have to do this at a grassroots level and we do this through our partnerships,” with seven financial development corporations located in regions throughout California.18 CURRENT OUTREACH EFFORTS In spite of these difficulties, the Rebuilding Fund and its partners have engaged in various outreach strategies, including testing radio advertisements in markets outside of big cities, holding informational webinars, and utilizing grassroots networks to raise awareness about the program.19 For example, the California Association for Micro Enterprise Opportunity and the Small Business LITTLE HOOVER COMMISSION WWW.LHC.CA.GOV | 6 Issue Brief: Assessing the California Rebuilding Fund June 2022 Majority, both partners of the Fund, have trained more than 400 business support organizations across California about the Fund and how to support small businesses through the process of applying for a loan. Additionally, the Fund has held three local government convenings to engage jurisdictions and provide them with the tools they need to conduct outreach about the Fund in their communities.20 As grant funds expire, Rebuilding Fund partners plan to further expand their outreach efforts. Earlier this year the Fund began its largest outreach effort to date in the form of a marketing partnership with Lendistry, a California-based CDFI which administered the state’s Small Business COVID-19 Relief Grant Program in 2021. Together with Lendistry, the Fund ran an email marketing campaign in Spring 2022 directed toward the 440,000 small businesses who applied for grants in 2021, resulting in a significant increase in loan applications.21 RECOVERY VS. EMERGENCY SUPPORT Despite these efforts, experts told the Commission there is ample opportunity for the state to take a greater role in outreach efforts, particularly in regard to more effectively leveraging its networks to promote the Rebuilding Fund as a pathway to long-term small business recovery from the COVID-19 pandemic rather than relying on grants for short-lived emergency support.22 Crucial to this work is expanding the program to more areas of California, such as Riverside and San Bernardino, where lack of access to and awareness about the Rebuilding Fund leaves businesses vulnerable to predatory lenders. “I’ve talked to a number of partners on discussing access to capital with startup, emerging, and growing businesses in our region, and I can tell you for certain, this tool is not coming up as a solution,” testified Ms. Kennedy, whose CDFI AmPac Business Capital is located in the Inland Empire.23 By leading and amplifying outreach efforts to small businesses in more communities, California can also help establish an element crucial to the Rebuilding Fund’s success: trust. As Mr. Wu emphasized to the Commission, “It’s not just about making it known that [the Rebuilding Fund] is available, it’s also earning the trust of those communities that haven’t historically had great trust in financial institutions.”24 Raising State and Private Capital A key feature of the Rebuilding Fund is leveraging state funding to attract capital investment from private lenders. Yet this too has been difficult to achieve, the Commission learned. As of Spring 2022, private capital has invested $87.5 million into the Rebuilding Fund. Added to the state’s investment of $37.5 million, this creates a total fund size of $125 million – a notable accomplishment but far short of the initial goal of raising $250-500 million.25 The Rebuilding Fund appears to have encountered a few challenges with regard to leveraging state funding. Due to the pandemic, it is not clear how the default rate for businesses receiving loans will compare to historic averages.26 This may make it difficult for the Rebuilding Fund to leverage state dollars aggressively and the Fund may seek to maintain a higher reserve of state dollars LITTLE HOOVER COMMISSION WWW.LHC.CA.GOV | 7 Issue Brief: Assessing the California Rebuilding Fund June 2022 than it might in more normal economic conditions. At the same time, it has also been difficult to increase state funding, since it is probable that the state’s contribution will be lost to loan defaults because the state’s contribution is “first-loss capital.”27 As a result, the state is hesitant to commit to additional long-term buy-in, even though state dollars are necessary to attract private participation. “Raising the private capital in California has been another challenge,” testified Ms. Bafford, explaining that “the reaction from national and regional banks has been less robust in California than in other states and despite a lot of interest and enthusiasm, corporates and insurance companies have been slow to execute.”28 Noting the slower than expected rollout of the Rebuilding Fund, Ms. Bafford also identified several factors impacting banks’ participation in the Rebuilding Fund. First, concessionary capital is more difficult to identify now that interest rates are rising and the urgency of COVID-19 and its impacts on small businesses has largely passed. Second, “this kind of financial structure, particularly for CDFIs, is new,” Ms. Bafford explained, “so a lot of banks don’t have the framework to assess risk of an asset-backed structure like this.” Consequently, the Rebuilding Fund is getting “ping-ponged” around large financial institutions to determine where the program best fits within their lending structure. “[We are] working with a lot of financial institutions, but it’s taking a lot of education,” Ms. Bafford told the Commission.29 “It’s not just about making it known that [the Rebuilding Fund] is available, it’s also earning the trust of those communities that haven’t historically had great trust in financial institutions.” - Scott Wu, Executive Director of IBank A potential source of additional funding for the Rebuilding Fund was the federal State Small Business Credit Initiative (SSBCI), which will provide $10 billion in federal funding to state small business credit support and investment programs. California will likely receive $895 million in SSBCI funding. California intends, however, to split its SSBCI allocation between IBank’s Small Business Loan Guarantee Program and the Treasurer’s California Capital Access Program (CalCAP), using the funds to replenish these established programs. Staff have not been able to determine if state government considered using a portion of SSBCI funds to support the Rebuilding Fund. The Small Business Loan Guarantee Program and CalCAP differ from the Rebuilding Fund in that they may provide larger loans to businesses too large to qualify for the Rebuilding Fund. IBank’s Small Business Loan Guarantee Program provides loans of up to $20 million to small businesses with anywhere from one to 750 employees.30 In the 2019-20 fiscal year, this program guaranteed 470 loans amounting to $240 million, which suggests that the average loan supported by this LITTLE HOOVER COMMISSION WWW.LHC.CA.GOV | 8 Issue Brief: Assessing the California Rebuilding Fund June 2022 program was about $510,000.31 CalCAP’s maximum loan amount is $5 million (with a maximum enrolled amount of $2.5 million) for small businesses with fewer than 500 employees.32 The average loan size for CalCAP, however, is comparable to that of the Rebuilding Fund’s average of $60,000. In 2020, CalCAP supported 5,312 loans amounting to approximately $362.4 million, suggesting that the average loan size was about $68,000.33 Local Funding Leveraging local funding is an important factor in determining how Rebuilding Fund loans are distributed throughout California. Officials in San Francisco and Santa Clara counties recognized the opportunity and the value of leveraging local dollars to receive a greater share of Rebuilding Fund Loans for their local businesses. Speaking about the launch of the San Francisco Small Business Recovery Loan Fund, local officials emphasized the impact of their actions to maximize available loans to businesses. “Small businesses led the way out of the Great Recession and they can do it again now, but not without access to business support and flexible and affordable credit,” said San Francisco’s Director of the Office of Economic and Workforce Development Kate Sofis. “Our small businesses need a continued, concerted effort to help them rebuild and reopen safely. The San Francisco Small Business Recovery Loan Fund will allow them to obtain the capital they need to quickly get back on their feet, hire workers, and become operational without worrying interest payments.”34 When Santa Clara County voted in December 2020 to invest an initial $6 million into the Rebuilding Fund for the benefit of Santa Clara small businesses, County Supervisor Joe Simitian summarized the intent of this approach: “We need all the state and federal help we can get, but by using these local dollars as well we can make sure local [Santa Clara County] businesses and their employees make their way to the top of the list.”35 These two counties’ investments into the Rebuilding Fund beg the question whether other counties in California can do the same. The Fund was designed to be as flexible as possible for counties to partner with the program and help support businesses in their communities, experts told the Commission. As Mr. Wu of IBank explained, “It was our hope and continues to be our hope that we were putting up the anchor investment to lead into this process in which we could engage with jurisdictions throughout the state to also pitch in local resources and to drive both demand and supply of capital within their communities.”36 LITTLE HOOVER COMMISSION WWW.LHC.CA.GOV | 9 Issue Brief: Assessing the California Rebuilding Fund June 2022 Appendix A: Detailed Overview of the Rebuilding Fund The Rebuilding Fund is housed in the California Infrastructure and Economic Development Bank (IBank) and managed by Calvert Impact Capital and Kiva Capital Management, which are nonprofit investment organizations focused on underserved communities. The Rebuilding Fund originally emerged out of a proposal from the California Small Enterprise Task Force, a consortium of legal, financial, and nonprofit professionals in the San Francisco Bay Area working to support small businesses impacted by the pandemic. WHY WAS IT NEEDED? “California small businesses, particularly those in underserved and underbanked communities, are starved for capital.”37 This August 2020 assessment from the California Infrastructure and Economic Development Bank (IBank) aptly summarizes the dire situation facing small businesses during the COVID-19 pandemic. By the end of that same month, California had the second highest rate of small business closures among the states; of the ten U.S. metro areas with the highest rates of small business closure, six were in California – San Francisco, San Diego, San Jose, Riverside, Los Angeles, and Sacramento. The impact of the pandemic was most severe on minority-owned businesses. According to one study of national small business closures, 41 percent of Black-owned businesses and 31 percent of Latino-owned businesses nationally had shut down at least temporarily in April 2020. In comparison, only 17 percent of White-owned businesses had closed.38 Although minority-owned businesses were disproportionately impacted by the pandemic, they appear to have been underserved by federal relief programs. A national survey of minority business owners who applied for first round Payment Protection Program (PPP) funding found that only 12 percent received the PPP loan assistance they requested, compared to 38 percent of small business owners overall. This challenge to securing federal funding was substantially rooted in minority-owned businesses’ historical lack of access to the financial system.39 While IBank operates numerous programs through its Small Business Finance Center that are designed to help small businesses experiencing barriers to accessing capital, these programs were unable to meet the unprecedented needs of small businesses during the COVID-19 pandemic. “The Center’s existing programs operate well during normal economic times,” IBank staff noted in a 2020 report to IBank’s Board of Directors. “Unfortunately, these are not normal economic times.”40 In normal times, the Center’s programs largely depend on small business lenders “having sufficient liquidity and balance sheet capacity to make small business loans,” for which IBank provides credit and other financial support. Yet due to the pandemic, many small business lenders – particularly community and mission-based lenders – did not have the necessary cash on hand to make these loans. As a result, IBank’s existing programs alone were unable to facilitate access to much-needed capital.41 LITTLE HOOVER COMMISSION WWW.LHC.CA.GOV | 10 Issue Brief: Assessing the California Rebuilding Fund June 2022 “Solving the problem,” IBank staff concluded, “requires a new IBank program and new financing vehicles to move needed cash to lenders focusing on the underbanked and underserved California small business community.”42 The Rebuilding Fund was meant to serve this purpose and it was designed to make capital available to community lenders so that they would be able to continue to loan to small businesses. THE REBUILDING FUND PROCESS The California Rebuilding Fund process begins by attracting investment from private, philanthropic, and public sector sources. The Fund attracts the capital it needs to provide funding for small business loans through a lending hierarchy of Series A, B, and C lenders that minimizes the lending risk for private and philanthropic sources and places it on public sector sources instead: ◊ Series A lenders are the highest priority lenders; they are commercial sources and receive an interest rate of up to 2.5 percent on the money they loan to the Fund. ◊ Series B lenders are the second priority lenders; they are commercial and philanthropic sources and may potentially receive interest on the money they loan to the Fund. ◊ Series C lenders are the lowest priority lenders; right now, IBank is the only lender in this series and it will not receive any interest on the money it loans to the Fund. As the lowest priority lender, IBank’s initial contribution to the Fund of $25 million serves as “first loss capital,” meaning its money is the most at risk for loss in the lending hierarchy. Any loan defaults that occur “will be charged against IBank’s loan first,” making repayment to the Series A and B lenders more likely. Such a distinction is crucial to attracting low-cost capital from Series A and B lenders, who will likely be more willing to loan to the Fund considering that any losses accrue to IBank first.43 Figure 1. California Rebuilding Fund Process Source: Calvert Impact Capital, CRF USA, Pacific Community Ventures, Kiva LITTLE HOOVER COMMISSION WWW.LHC.CA.GOV | 11 Issue Brief: Assessing the California Rebuilding Fund June 2022 The capital the Fund receives from its lenders is then aggregated and used to make loans directly to Community Development Financial Institutions (CDFIs). CDFIs use the capital loaned to them from the Fund to provide loans of up to $100,000 to eligible small businesses – those with 50 or fewer employees and less than $5 million in annual revenue. Small businesses must complete a 16-question pre-application through the proprietary technology platform Connect2Capital to determine if they are eligible to receive a loan from the Fund. If eligible, a small business is then matched with a CDFI participating in the Fund, which verifies the business’s eligibility, “invites them to submit a full application,” and underwrites and approves the loan.44 CDFIs are able to provide funding to small businesses very quickly; loans under $50,000 are auto-approved within one day, while loans up to $100,000 are approved within three days.45 Once a loan to a small business has been underwritten and approved, the CDFI transfers 90 to 95 percent of the loan to one of two special purpose vehicles (SPV), entities established to safely hold Rebuilding Fund loans. The SPVs allow CDFIs to remove the majority of the loan from their balance sheets, enabling them to continue lending to their communities in other capacities. The CDFI then retains “5 to 10 percent of the loan on their balance sheet and maintains the servicing relationship” with the small business.46 The small business loans assigned to the SPVs are “the sole source of repayment for the Series A through C loans. The Series A-C lenders get repaid only if the underlying small businesses repay their underlying loans.”47 Small businesses have five years to repay their loans at an interest rate of 4.25 percent.48 WHO IS INVOLVED? California state government, community-based lenders, private sector banks, and non-profit organizations are all involved in the Rebuilding Fund:49 ◊ State of California. California’s participation is led by IBank as well as the state’s network of Small Business Development Centers (SBDCs), which provide tools and guidance to the small business community.50 ◊ California-Based Community Lenders. CDFIs originate and service small business loans from the Fund and provide critical loan support to businesses in their community. ◊ California Small Enterprise Task Force (CASE). CASE is a consortium of legal, financial, and nonprofit professionals in the San Francisco Bay Area working to support small businesses impacted by the pandemic. Members of CASE designed the structure of the Rebuilding Fund. ◊ National Non-Profit Partners. Three national non-profit organizations handle the administrative and technical functions of the Rebuilding Fund. Calvert Impact Capital is the lead CDFI of the Fund and handles program management and capital raising. Kiva Microfunds and its subsidiary, Kiva Capital Management LLC, own the Fund as well as the SPVs designed to hold the loans. Community Reinvestment Fund, USA is the Fund’s Technical Services Provider and provides use of their proprietary platform, Connect2Capital, for loan applications, program- wide data management and tracking, and loan level reporting. LITTLE HOOVER COMMISSION WWW.LHC.CA.GOV | 12 Issue Brief: Assessing the California Rebuilding Fund June 2022 ◊ Investors. Whether banks, corporations, or philanthropic donors, investments from these sources provide the liquidity necessary for the Fund to operate. ◊ Legal Counsel. Legal counsel for the Fund is provided pro bono by Morrison & Foerster. RELATIONSHIP OF REBUILDING FUND TO OTHER SMALL BUSINESS PROGRAMS Following the creation of the Rebuilding Fund, additional federal aid and an improved state budget position enabled California to create additional programs to address the immediate needs of businesses. California has committed billions of dollars in state funding to grant programs that are designed to assist small businesses during the COVID-19 pandemic. The state’s largest effort, the Small Business COVID-19 Relief Grant Program, was launched in November 2020 to provide grants ranging from $5,000 to $25,000 to small businesses and non-profit organizations.51 This program has provided $4 billion in support to nearly 44,000 small businesses and nonprofit organizations.52 California has also dedicated $50 million in funding to its Microbusiness COVID-19 Relief Grant Program, which provides grants of $2,500 to the smallest of small businesses – those with five or fewer full-time employees.53 Nevertheless, the goal of these grant programs differs crucially from the goal of the Rebuilding Fund. While these grant programs sought to replace income businesses lost due to the COVID-19 pandemic, the Rebuilding Fund instead seeks to provide businesses the capital they need to rebuild and grow. Additionally, the Fund connects small businesses to CDFIs in their communities, which provides critical access to the resources businesses need to become “bankable” and receive further financing in the future. Consequently, as California’s economy recovers and need for grant relief subsides, it is possible both that demand for Rebuilding Fund loans may increase and that the Fund can help small businesses from underserved communities overcome historic barriers to capital. Notes 1. Note: The Rebuilding Fund is not a sole fund. Money is distributed 3. California Infrastructure and Economic Development Bank Staff in two tranches with slightly different terms. Also, Office of Report, see endnote 2. Governor Gavin Newsom. “Governor Newsom Announces Launch 4. California Infrastructure and Economic Development Bank Staff of California Rebuilding Fund to Help State’s Smallest Businesses Report, see endnote 2. Protect their California Dream.” November 20, 2020. https://www. 5. Beth Bafford, Vice President, Strategy, Calvert Impact Capital. gov.ca.gov/2020/11/20/governor-newsom-announces-launch- Personal communication with Commission staff. May 18, 2022. of-california-rebuilding-fund-to-help-states-smallest-businesses- protect-their-california-dream/ Also, Rocio Sanchez-Moyano. 6. Beth Bafford, Calvert Impact Capital, see endnote 5. “Lessons Learned From Small Business Lending During COVID-19: 7. Beth Bafford, Calvert Impact Capital, see endnote 5. A Case Study of the California Rebuilding Fund.” Federal Reserve 8. Beth Bafford, Calvert Impact Capital, see endnote 5. Bank of San Francisco Community Development Research Brief 2022-3. https://www.frbsf.org/community-development/wp- 9. City and County of San Francisco – Office of the Mayor. “Mayor content/uploads/sites/3/case-study-of-the-california-rebuilding- Breed Launches $12 Million San Francisco Small Business Recovery fund-sffed-cdrb-2022-03.pdf Loan Fund.” July 8, 2021. https://sfmayor.org/article/mayor-breed- launches-12-million-san-francisco-small-business-recovery-loan- 2. Rocio Sanchez-Moyano, see endnote 1. Also, California fund Infrastructure and Economic Development Bank. “Small Business Loan Catalyst Program – Small Business Lending Fund 10. Beth Bafford, Calvert Impact Capital. Written Testimony to the Participation Staff Report.” December 16, 2020. https://www.ibank. Commission. March 24, 2022. https://lhc.ca.gov/sites/lhc.ca.gov/ ca.gov/wp-content/uploads/2020/12/5.b.-Att.-1-to-CA-Rebuilding- files/Reports/254/COVIDWrittenTestimony/BaffordMar2022.pdf Fund-AR-Reso.-Staff-Report-12-16-2020-Meeting.pdf 11. Beth Bafford, Vice President, Strategy, Calvert Impact Capital. LITTLE HOOVER COMMISSION WWW.LHC.CA.GOV | 13 Issue Brief: Assessing the California Rebuilding Fund June 2022 Personal communication with Commission staff. December 8, 34. City and County of San Francisco – Office of the Mayor. “Mayor 2021. Breed Launches $12 Million San Francisco Small Business Recovery 12. Madelyn Reese. “Santa Clara County to offer small-business loans Loan Fund.” July 8, 2021. https://sfmayor.org/article/mayor-breed- through state fund.” San Jose Spotlight. December 9, 2020. https:// launches-12-million-san-francisco-small-business-recovery-loan- sanjosespotlight.com/santa-clara-county-to-offer-small-business- fund loans-through-state-fund/. Also, Michael Moore. “Santa Clara 35. County of Santa Clara – Supervisor Joe Simitian District 5. “Santa County Plans to Offer $6 Million in Low-Interest Loans for Small Clara County Launches Small Business Loan Program.” January 4, Businesses.” San Jose Inside. December 18, 2020. https://www. 2021. https://district5.sccgov.org/press-release/santa-clara-county- sanjoseinside.com/news/santa-clara-county-to-offer-low-interest- launches-small-business-loan-program loans-to-small-businesses/. Also, Beth Bafford, Calvert Impact 36. Scott Wu, California Infrastructure and Economic Development Capital, see endnote 10. Bank, see endnote 18. 13. California Infrastructure and Economic Development Bank Staff 37. California Infrastructure and Economic Development Bank Staff Report, see endnote 2. Report, see endnote 2. 14. Hilda Kennedy, Founder and President, AmPac Business Capital. 38. Little Hoover Commission. First Steps toward Recovery: Saving Written testimony to the Commission. March 24, 2022. https://lhc. Small Businesses. December 2020. https://lhc.ca.gov/sites/lhc. ca.gov/sites/lhc.ca.gov/files/Reports/254/COVIDWrittenTestimony/ ca.gov/files/Reports/254/Report254.pdf KennedyMar2022.pdf 39. Little Hoover Commission, see endnote 38. 15. Scott Wu, Executive Director, California Infrastructure and 40. California Infrastructure and Economic Development Bank Staff Economic Development Bank. Written and verbal testimony to the Report, see endnote 2. Commission. March 24, 2022. https://lhc.ca.gov/sites/lhc.ca.gov/ files/Reports/254/COVIDWrittenTestimony/WuMar2022.pdf 41. California Infrastructure and Economic Development Bank Staff Report, see endnote 2. 16. Beth Bafford, Calvert Impact Capital, see endnote 10. 42. California Infrastructure and Economic Development Bank Staff 17. Beth Bafford, Calvert Impact Capital, see endnote 10. Report, see endnote 2. 18. Scott Wu, Executive Director, California Infrastructure and 43. California Infrastructure and Economic Development Bank Staff Economic Development Bank. Verbal testimony to the Report, see endnote 2. Commission. March 24, 2022. 44. Beth Bafford, Calvert Impact Capital; Dan Moret, CRF USA; Bulbul 19. Beth Bafford, Vice President, Strategy, Calvert Impact Capital. Gupta, Pacific Community Ventures; Rohit Agarwal, Kiva. “How Personal communication with Commission staff. January 13, 2022. Does it Work?” Presentation delivered at UC Berkeley Haas School 20. Beth Bafford, Calvert Impact Capital, see endnote 10. of Business’s Information Forum for California Local Governments 21. Scott Wu, California Infrastructure and Economic Development on the California Rebuilding Fund. https://haas.berkeley.edu/wp- Bank, see endnote 15. Also, Beth Bafford, Vice President, Strategy, content/uploads/CA-Rebuilding-Fund_Local-Government-Forum. Calvert Impact Capital. Personal communication with Commission pdf staff. March 11, 2022. 45. Beth Bafford, Calvert Impact Capital; Dan Moret, CRF USA; Bulbul 22. Beth Bafford, Calvert Impact Capital, see endnote 19. Also, Hilda Gupta, Pacific Community Ventures; Rohit Agarwal, Kiva, see Kennedy, AmPac Business Capital, see endnote 14. endnote 44. 23. Hilda Kennedy, AmPac Business Capital, see endnote 14. 46. Beth Bafford, Calvert Impact Capital; Dan Moret, CRF USA; Bulbul 24. Scott Wu, California Infrastructure and Economic Development Gupta, Pacific Community Ventures; Rohit Agarwal, Kiva, see Bank, see endnote 18. endnote 44. 25. Beth Bafford, Calvert Impact Capital, see endnote 10. Also, Rocio 47. California Infrastructure and Economic Development Bank Staff Sanchez-Moyano, see endnote 1. Report, see endnote 2. 26. Beth Bafford, Calvert Impact Capital, see endnote 19. 48. California Infrastructure and Economic Development Bank Staff Report, see endnote 2. 27. California Infrastructure and Economic Development Bank Staff Report, see endnote 2. 49. Rocio Sanchez-Moyano, see endnote 1. Also, Mark Herbert, Small Business Majority; Adair Morse, UC Berkeley Haas School 28. Beth Bafford, Calvert Impact Capital, see endnote 10. of Business. “Community Engagement and Outreach” and 29. Beth Bafford, Calvert Impact Capital, see endnote 10. “Allocations and Reach” presentations delivered at UC Berkeley 30. California Infrastructure and Economic Development Bank. “Loan Haas School of Business’s Information Forum for California Local Guarantee Program.” https://ibank.ca.gov/small-business/loan- Governments on the California Rebuilding Fund. https://haas. guarantees/ berkeley.edu/wp-content/uploads/CA-Rebuilding-Fund_Local- Government-Forum.pdf 31. California Capital Financial Development Corporation. “State Loan Guarantee Program.” https://cacapital.org/business-loans/state- 50. America’s SBDC California. “About Us.” https://www.californiasbdc. loan-guarantee-program/ org/about-us/about-sbdc-california-sbdc. Also, Mark Herbert, Small Business Majority; Adair Morse, UC Berkeley Haas School of 32. California Infrastructure and Economic Development Bank. Business, see endnote 49. “2019/2020 Small Business Finance Center Annual Report.” https:// www.ibank.ca.gov/wp-content/uploads/2021/01/IBank-SBFC-2019- 51. Office of Governor Gavin Newsom. “Governor Newsom Announces 2020-Annual-Report_FINAL_11.25.20.pdf Immediate Assistance for Businesses Impacted by COVID-19 Including Temporary Tax Relief and $500 Million in Grants.” 33. California State Treasurer. “California Capital Access Loan Program November 30, 2020. https://www.gov.ca.gov/2020/11/30/governor- (CalCAP) 2020 Annual Report to the Legislature.” May 2021. https:// newsom-announces-immediate-assistance-for-businesses- www.treasurer.ca.gov/cpcfa/calcap/annual/2020.pdf LITTLE HOOVER COMMISSION WWW.LHC.CA.GOV | 14 Issue Brief: Assessing the California Rebuilding Fund June 2022 impacted-by-covid-19-including-temporary-tax-relief-and-500- million-in-grants/ 52. Office of Governor Gavin Newsom. “California Roars Back: Governor Newsom Announces the Largest Small Business Relief Program in the Nation.” May 13, 2021. https://www.gov. ca.gov/2021/05/13/california-roars-back-governor-newsom- announces-the-largest-small-business-relief-program-in-the- nation/ 53. County of Santa Clara, Office of Communications and Public Affairs. “County Receives $2.4 Million State Grant for Very Small Businesses and Entrepreneurs Impacted by the COVID-19 Pandemic.” January 11, 2022. https://news.sccgov.org/news- release/county-receives-24-million-state-grant-very-small- businesses-and-entrepreneurs. Also, Riverside County Office of Economic Development. “Microbusiness COVID-19 Relief Grant Program.” https://rivcoed.org/microbusiness-covid19- relief-grant-program. Also, San Diego County. “Microbusiness COVID-19 Relief Grant Program.” https://www.sandiegocounty.gov/ microbusinessgrant.html Issue Brief: Assessing the California Rebuilding Fund June 2022 (916) 445-2125 | LittleHoover@lhc.ca.gov 925 L Street, Suite 805, Sacramento, CA 95814 LITTLE HOOVER COMMISSION WWW.LHC.CA.GOV | 15