Skip Repetitive Navigation Links
California State Auditor Logo

Report Number : 2016-133

SAFE-BIDCO
At Risk of Insolvency, It Needs Increased Oversight if It Is to Receive State Funding and Continue to Help Small Businesses in California Gain Financing

Response to the Audit




SAFE-BIDCO

Small Business Loans

STATE ASSISTANCE FUND FOR ENTERPRISE, BUSINESS AND INDUSTRIAL
DEVELOPMENT CORPORATION
1377 Corporate Center Parkway, Suite A
Santa Rosa, California 95407
(707) 577-8621 • (800) 273-8637 • FAX (707) 577-7348
www.safe-bidco.com

April 6, 2017

Elaine Howle, CPA
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Dear Ms Howle:

1
Thank you for the opportunity to respond to the California State Auditors report of State Assistance Fund for Enterprise, Business and Industrial Development Corporation (SAFE-BIDCO).  The final report will be shared with the SAFE-BIDCO Board of Directors.  We would like to note that although the board did ask to review the draft, the five day response time and confidentiality requirements did not allow time for the board to review the report and provide any input as a board.   The draft was also reviewed by SAFE-BIDCO Board Chairman Glen Stanley.

2
We appreciate the time and effort made by the Auditor’s Staff to review and analyze SAFE-BIDCO and its structure.  Although we do not agree with some of the observations made by the audit team we truly appreciate the time and thought that went into the data collection and analysis.  It is difficult to compare SAFE-BIDCO to other entities as we are the last remaining BIDCO in the State.  The other entities that we were compared with in the report are unregulated lenders, whereas SAFE-BIDCO is regulated by the Department of Business Oversight (DBO) and annually examined.

3
The SAFE-BIDCO board finds SAFE-BIDCO has been a well-kept secret for all too long.  What other program within the State can boast of leveraging a $2.5 million loan and a $750,000 appropriation into over $200 million small business loans and guarantees, without requesting any additional funding from the State,  and while fully supporting its operations independently from the State for over 35 years. 
4
In order to continue the mission and mandate it has become necessary for SAFE-BIDCO to seek an increase to its line of credit from the State.  This review was initiated by SAFE-BIDCO’s request to increase its line of credit from $2.5 it from $15 million.

We have no problem with any of the recommendations in the report, attached are our responses to the draft recommendations broken out by recommendation.

Again, than you for the opportunity to review and respond to the raft report.  If you have any questions, please do not hesitate to contact me at 707-577-8621.



Sincerely,

Mary Jo Dutra
President/CEO





SAFE-BIDCO - Management’s Response

Recommendations:

Legislature

To ensure that SAFE-BIDCO’s operations are subject to appropriate oversight and fulfill its mission of providing financing to small businesses, the Legislature should establish SAFE-BIDCO as a program within the State Treasurer’s Office.

To track SAFE-BIDCO’s performance in fulfilling its mission to provide assistance to California small businesses, the Legislature should require SAFE-BIDCO to report to the Legislature annually on its revenue and expenses and the success of its programs.

Response:

SAFE-BIDCO is not opposed to placing the program within an agency such the State Treasurer’s Office.   The Legislature created the corporation as a non-profit public benefit entity.  If placing the corporation within another agency will allow SAFE-BIDCO’s much needed programs to continue with access to needed capital we are in favor of the suggestion.

SAFE-BIDCO is not opposed to reporting annually to the State Legislature.  From 1981 – 1990 the corporation did report directly to the Legislature; in 1990 the reporting was transferred to the Office of Small Business within the Department of Commerce and in 2000 that office decided it only wanted information from SAFE-BIDCO on its State Loan Guarantee Program activity.  We are examined annually by the Department of Business Oversite (DBO), and as a component unit of government our annual Audited Financials have been submitted to the State Controller since 2012. 

Recommendation:

SAFE-BIDCO

If it is not established as a program within a state entity, SAFE-BIDCO should do the following:

Response:

Recommendation:

Regardless of whether SAFE-BIDCO is established as a program within a state entity, it should do the following:

Response:

Other areas reviewed and recommendations:

14
We were disappointed in the lack of recommendations on some of the issues requested; however we understand the complexity of the questions.   

Access to CalPERS retirement benefits
- we are not asking the state to pay for these benefits we are asking to place the funds we have already set aside into the system for the benefit of our employees.  It is less costly to have the State manage these funds than to hire outside sources to manage them for such a small staff.

Money at California Infrastructure and Economic Development Bank
  - Thank you for acknowledging that by IBank should be returned to SAFE-BIDCO, if the Legislature choses to appropriate funding and not make SAFE-BIDCO part of the State Treasurer’ office.

State Law Limiting Programs
- In addition to the information provided to you regarding the
16
SBA pilot program we provided you the same information from the U.S. Treasury regarding the Community Development Financial Institutions Fund (CDFI), where they too said SAFE-BIDCO was not eligible for the program because its board is controlled by a government entity.

SAFE-BIDCO Loan Committee

Recommendation:

Response:






Comments

CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM SAFE-BIDCO

To provide clarity and perspective, we are commenting on the response to our audit from SAFE-BIDCO. The numbers below correspond to the numbers we placed in the margin of SAFE‑BIDCO’s response.


1

The report SAFE-BIDCO’s statement that the five-day response period and confidentiality requirements did not allow time for the board to review the report and provide any input as a board is misleading. We informed SAFE-BIDCO in September 2016 at our opening conference of the legal process that can be used for the full board to meet in closed session to review the draft report. We also reminded SAFE-BIDCO of this process again in early March 2017 at the closing conference.


2

SAFE-BIDCO’s statement regarding comparing it to other entities is misleading. We compare SAFE‑BIDCO to other nonprofits in their efforts to obtain funding through donations and fundraising. SAFE‑BIDCO’s regulation as a lender has no bearing on this comparison.

3

As we acknowledge here, SAFE-BIDCO received initial funding of $750,000 and a loan of up to $2.5 million from the State. However, as for SAFE-BIDCO’s claim of fully supporting its operations for over 35 years, as we state here, it has spent more than it has earned for nine of the last 10 years and, because of its continual overspending, it could become insolvent as soon as June 2018. As a result, it has requested funding from the State, as we describe here.

4

SAFE‑BIDCO is mistaken. This audit was initiated at the direction of the Joint Legislative Audit Committee at its hearing in August 2016.

5

SAFE-BIDCO indicated to us that it would brief its board on this $2 million in potential new funding at its March 2017 board meeting, well after the completion of our audit fieldwork. Although we are encouraged that SAFE-BIDCO appears to have secured additional funding, $2 million falls far short of the $5.3 million in additional loans we indicate here that it needs to make annually just to prevent a further decline in its financial position. Further, as we note here, its agreement with the U.S. Department of Agriculture (USDA) requires SAFE‑BIDCO to hold loans made through the USDA Rural Loan Program as collateral for the loans made to SAFE‑BIDCO. Thus, these loans originating from the USDA Rural Loan Program’s financing earn interest but cannot be sold, limiting the usefulness of the funding to address SAFE-BIDCO’s financial problems.

6

The new information provided by SAFE-BIDCO does not change our conclusion here that it is premature and imprudent for SAFE-BIDCO to rely on this funding for its future operations. The U.S. Senate bill to reauthorize the EB‑5 Immigrant Investor Program (EB‑5 Program) that SAFE‑BIDCO mentions was introduced on March 27, 2017, only three days before we sent the draft report to SAFE-BIDCO for its review and response and, to our knowledge, has yet to pass. As a result, this does not change the fact that, as we state on that same page, the EB‑5 Program is scheduled to expire on April 28, 2017, and a bill was introduced in January 2017 in the U.S. Senate to end the program. Further, the federal government has not approved the formal plan to raise money under the EB-5 Program, and SAFE-BIDCO has no formalized timeline to access such funding.

7

SAFE-BIDCO should not let one method of attempting to obtain donations deter it from seeking future funding. As we discuss here, other nonprofit organizations we spoke to obtained funding from donors and sponsorships. By not engaging in these efforts, SAFE-BIDCO is missing out on potential sources of additional capital. To obtain donations and sponsorships, SAFE‑BIDCO should work to educate potential donors on the work it does and demonstrate why it is worthy of sponsorship or donations.

8

Although SAFE-BIDCO states that five board members volunteer for one or more board subcommittees, our review of SAFE‑BIDCO’s meeting minutes indicate that only four board members participate, as we state here.

9

We find it odd that SAFE-BIDCO qualifies its willingness to engage in competitive bidding by stating “as long as it does not contradict its enabling legislation.” The legislation it refers to gives SAFE‑BIDCO wide latitude to operate, as SAFE-BIDCO itself notes. We do not see that conducting competitive bidding would in any way conflict with or contradict its enabling legislation.

10

Despite SAFE-BIDCO’s indication that its State Loan Guarantee Program (we refer to this program as the California Small Business Loan Guarantee Program in the report) has had a steady increase in loan production and guarantees as a result of its business development contractor, as we state here the business development contractor did not meet the performance milestones specified in his contracts for fiscal years 2012–13 through 2015–16, yet SAFE-BIDCO continued to use this contractor. Additionally, as we also state on the same page, because the contractor did not meet performance goals consistently and because SAFE‑BIDCO did not seek competitive bids for his services, we question whether SAFE-BIDCO has received the best value for its money. Similarly, SAFE-BIDCO states that the second consultant was hired to work with state legislators and staff on behalf of SAFE‑BIDCO as the board members had been unsuccessful in making inroads with their appointing authorities. However, as we state here, although the recommendations from the consultant to develop a budget change proposal to request state funding and to develop a strategic plan may have been helpful, we question why SAFE-BIDCO, which has two legislative and three Governor’s appointees on its board, needed to spend $60,000 of its limited resources to obtain such advice.

11

The number of loan guarantees we present in Table 1 are based on our review of SAFE-BIDCO’s loan files. In total, we identified 102 guarantees totaling $36.2 million for fiscal years 2011–12 through 2015–16. The amounts presented by SAFE-BIDCO are slightly higher, 111 guarantees totaling $39.5 million. It is not clear to us how SAFE-BIDCO arrived at the numbers in its response.

12

We disagree with SAFE-BIDCO’s statement that all travel reviewed and included in our report was for the research and development of additional funding sources and programs. As we state here, given its mission to act as a catalyst for economic development in California and the fact that almost half of SAFE-BIDCO’s programs focus on counties in Northern California, we question the prudence of the quantity of its out-of-state travel.

13

SAFE-BIDCO states that it has always been praised for the organization of its loan files and the ease of accessing information. Although that may be true, organization and ease of access have nothing to do with the accuracy of SAFE-BIDCO’s files. As we state here, we identified three errors in the 14 loan files reviewed and these errors could have been prevented if SAFE-BIDCO had established a consistent review process for its loan files.

14

Although SAFE-BIDCO states that it is disappointed in the lack of recommendations on some of the issues requested, we fully reviewed the issues we were asked to review by the Joint Legislative Audit Committee and believe our recommendations are appropriate.

15

SAFE-BIDCO is mistaken. Our report does not state that the $750,000 taken by the California Infrastructure and Economic Development Bank should be returned to SAFE-BIDCO. We state here that if the Legislature chooses to appropriate funding and require additional oversight of SAFE‑BIDCO but does not make SAFE-BIDCO part of the State Treasurer’s Office, return of the funds may be warranted.

16

The audit request asked us to assess whether state law has limited the number of programs or services that SAFE‑BIDCO has been able to provide. Although SAFE-BIDCO did provide a letter to us indicating that its application to become a Community Development Financial Institution was denied in November 2002 because of the composition of its board, this was not a program but a designation and would not immediately result in funding.

Back to top