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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



Summary

HIGHLIGHTS

Our review concerning the financial condition and operations of the State Assistance Fund for Enterprise, Business and Industrial Development Corporation (SAFE-BIDCO) revealed the following:


Results in Brief

The State Assistance Fund for Enterprise, Business and Industrial Development Corporation (SAFE‑BIDCO) has spent more than it has earned over the past decade and needs additional capital if it is to continue its mission of helping to provide financing to California’s small businesses. Initially funded by an appropriation and a loan from the State in 1981, SAFE‑BIDCO, which is a nonprofit organization overseen by a governing board, has over the years operated eight programs designed to help small businesses obtain financing in the form of direct loans and loan guarantees. SAFE‑BIDCO estimates that it has helped create more than 13,000 jobs during that time.

However, because of its declining financial condition, SAFE‑BIDCO in recent years has had limited funds to make loans. We estimate that SAFE‑BIDCO could become insolvent as soon as June 2018, so it needs additional capital if it is to continue its operations. According to its chief executive officer (CEO), SAFE‑BIDCO’s declining financial position is primarily the result of historically low interest rates and the low amount of available capital it has to make loans, and this situation has limited the revenue SAFE‑BIDCO can earn through lending. However, our review has identified other factors, such as insufficient efforts to obtain additional capital and questionable expenses, that have negatively affected SAFE‑BIDCO’s financial condition.

SAFE‑BIDCO’s management of its operations raises concerns about whether the State should appropriate any funding to it without increasing the State’s direct oversight of SAFE‑BIDCO’s expenses and performance. SAFE‑BIDCO has not taken sufficient steps to raise additional capital on its own to address its financial condition. Although it has borrowed funds to make loans, obtained grants, and sold some of its loans to raise capital, these efforts have not generated sufficient funds to address its declining net assets. Also, even though SAFE‑BIDCO is a nonprofit, it has not attempted to obtain capital from donations, which similar organizations providing comparable lending services and assistance to small business indicated to us they had obtained to support their programs. Further, SAFE‑BIDCO has been unsuccessful in obtaining additional funds from the State.

Despite its declining financial position, SAFE‑BIDCO has imprudently spent its limited funds on questionable items, such as continuing its contract with a business development contractor who did not meet his performance goals in each of the last four fiscal years. SAFE‑BIDCO has continued with this contract without seeking competitive bids for these services to ensure that it is receiving the best value for its limited funds.

The CEO also spent a substantial portion of SAFE‑BIDCO’s travel expenses on out‑of‑state travel and a trip to Ireland. The CEO stated that given SAFE‑BIDCO’s inability to secure state funding, she has traveled to research federal programs that might once again be possibilities for funding. Specifically, she stated that her travel resulted in an increase in grant funding from the U.S. Department of Agriculture (USDA). However, we noted that SAFE‑BIDCO has worked with the USDA for more than 10 years. Further, the trip to Ireland involved a conference sponsored by an Internet marketing business owned by a then‑board member of SAFE‑BIDCO. In addition, the CEO attended two other conferences in Washington, D.C., held by the same business, giving the appearance that the board member personally benefited from his position on SAFE‑BIDCO’s board. The total cost to attend these three conferences was $10,000 plus travel expenses. These expenses for out‑of‑state travel are particularly troubling because SAFE‑BIDCO’s mission is to act as a catalyst for economic development in California by providing access to alternative loan programs for small businesses.

A lack of oversight and insufficient tracking of performance obscured the issues now facing SAFE‑BIDCO. Existing oversight by the State is limited to an annual examination by the Department of Business Oversight (Business Oversight), which focuses on determining the soundness of SAFE‑BIDCO’s lending. Although we reviewed the reports from the annual examinations since 2011, state law prevents us from disclosing the content of the reports without Business Oversight’s release of the reports. We requested that Business Oversight release the reports, which we believe is allowed under a reasonable interpretation of the law, but it declined to do so. SAFE‑BIDCO’s board is the body primarily responsible for overseeing its operations. However, it has been hampered by the voluminous and inconsistent reports provided to it by SAFE‑BIDCO’s staff and by a lack of information on program performance. SAFE‑BIDCO typically reports either the total dollar value of loans it hopes to make or the revenue it hopes to generate from loan programs. Unfortunately, it has not made the critical link between the dollar value of loans it needs to make to meet its revenue goals. Therefore, board members have not received sufficient information to determine whether the goals established are adequate.

Although it is clear that SAFE‑BIDCO needs capital to continue its mission to assist small businesses, we are reluctant to recommend that the State appropriate funding without increased direct oversight of SAFE‑BIDCO to ensure adequate reporting and controlled expenses. We believe direct oversight could occur by the Legislature’s establishing SAFE‑BIDCO as a program within the State Treasurer’s Office (Treasurer’s Office).

Selected Recommendations

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

To obtain needed capital, SAFE-BIDCO should raise funds by seeking donations.

To obtain the best value for its limited funds, SAFE‑BIDCO should by October 2017 establish a policy and related procedures requiring that it seek competitive bids for significant contracted services. The policy should establish a dollar threshold for what services SAFE‑BIDCO considers significant.

To ensure that it spends its funds furthering its mission of helping California small businesses, SAFE‑BIDCO should decrease its travel expenses by adopting a travel budget in consideration of its expenses and mission and limiting out‑of‑state travel.

To ensure that decision makers—such as the board of directors, Legislature, and other stakeholders—have sufficient information to assess its performance, SAFE‑BIDCO should by October 2017 create one central report for its board that includes revenue goals and actual performance for each program it operates.

Agency Comments

SAFE-BIDCO indicated that it is taking steps to implement our recommendations and would not be opposed to placing its programs within a state agency if it would allow its programs to continue. However, it states that it is difficult to compare it to other entities and notes that the out-of-state travel we discuss was to research and develop additional funding sources and programs.

To review the agency response and our comments to the response, please click here.




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