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Report Number : 2016-133

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

Audit Results

The State Assistance Fund for Enterprise, Business and Industrial Development Corporation (SAFE‑BIDCO) has spent more than it has earned in each of the past five fiscal years, and its net assets have declined from $3.7 million to $1.3 million over the five‑year period. As a result of its continual overspending and declining net assets, SAFE‑BIDCO could become insolvent as soon as June 2018, leaving it unable to continue to operate and to help California’s small businesses to obtain financing and create jobs. Because of its declining net assets, SAFE‑BIDCO has made fewer loans in recent years, and it needs additional capital to make loans so that it can generate enough revenue to cover its expenses. However, despite the decline in its net assets, SAFE‑BIDCO has been unsuccessful in obtaining sufficient additional capital. SAFE‑BIDCO also used its limited resources to make questionable spending decisions regarding some of its contractors, out‑of‑state travel, and, in one instance, international travel.

SAFE‑BIDCO Could Be Insolvent as Early as June 2018

SAFE‑BIDCO’s expenses were greater than its revenue in each of the last five fiscal years and in nine of the last 10 fiscal years. Except in the case of fiscal year 2007–08, SAFE‑BIDCO’s expenses were between $170,000 and $656,000 more than its revenue in each of the last 10 years. The one time in the last 10 years when its revenue exceeded expenses occurred because SAFE‑BIDCO received forgiveness of an obligation from the U.S. Department of Energy (Energy). According to its audited financial statements, SAFE‑BIDCO contracted with the State to manage the $2.75 million federal Energy Efficiency Improvements Loan Fund in 1987 for the purpose of providing direct loan assistance to small businesses for the installation of projects to improve energy efficiency. In 2008 Energy determined that the program funds were fully expended and released all claim to the $2.75 million.  Without the forgiveness of that outstanding obligation, SAFE‑BIDCO would have spent more than it earned in that year as well.

Because SAFE‑BIDCO’s expenses have exceeded revenue in each of the last five fiscal years, its net assets—the difference between its total assets and total liabilities—have declined from $3.7 million on July 1, 2011, to $1.3 million on June 30, 2016. If SAFE‑BIDCO continues this pattern of spending more than it earns, it will become insolvent, leaving it unable to continue to operate. Using SAFE‑BIDCO’s history of expenses and revenue for fiscal years 2011–12 through 2015–16, we project that in the worst case, SAFE‑BIDCO could become insolvent as soon as June 2018, as shown in Figure 4.

Figure 4

SAFE-BIDCO Could Be Insolvent as Soon as June 2018
(Dollars in Millions)

Figure 4 is a line graph showing three projections of when SAFE-BIDCO could become insolvent.

Source: California State Auditor’s analysis of audited financial statements for SAFE-BIDCO for fiscal years 2011–12 through 2015–16.

Notes: Insolvency is defined as a situation when assets in excess of liabilities decline below $0.

Average projection is based on the average change in net assets for fiscal years 2011–12 through 2015–16 ($396,000) projected at a constant rate.

Best‑case projection is based on smallest annual decline in net assets for fiscal years 2011–12 through 2015–16 ($170,000) projected at a constant rate.

Worst‑case projection
is based on largest annual decline in net assets for fiscal years 2011–12 through 2015–16 ($656,000) projected at a constant rate.

As a result of its declining net assets, SAFE‑BIDCO has made fewer loans in recent years, hampering its ability to generate sufficient revenue to cover its expenses. When SAFE‑BIDCO acts as a lender, it can generate revenue through fees it charges borrowers and through interest on the outstanding loan balances. For some of its loan programs, a portion of each loan SAFE‑BIDCO makes is guaranteed by the U.S. Small Business Administration (SBA). SAFE‑BIDCO not only earns interest on the outstanding balance of the loan, but it also can sell at a premium the portion of the loan guaranteed by the federal government because the SBA will purchase that portion if the borrower defaults on the loan. As shown in Table 1, the number of loans SAFE‑BIDCO made in fiscal years 2011–12 through 2015–16 was 54, but it made only 12 of those since July 2014. As SAFE‑BIDCO makes fewer loans, it provides less assistance to help create jobs.

Table 1
SAFE-BIDCO’s Total Number of Loans Made Annually Has Declined, While Its Number of Loan Guarantees Has Generally Increased
Fiscal Years 2011–12 Through 2015–16
(Dollars in Thousands)
Fiscal Year Loans Loan Guarantees
Dollar Value Number of Loans Dollar Value Number of Loan Guarantees
2011–12 $2,970 18 $4,507 17
2012–13 2,012 16 4,158 18
2013–14 755 8 5,927 20
2014–15 775 9 10,448 25
2015–16 525 3 11,182 22
Totals $7,037 54 $36,222 102

Source: SAFE-BIDCO’s loan and loan guarantee files.

The revenue SAFE‑BIDCO generated from its loans declined from $517,000 in fiscal year 2011–12 to $261,000 in fiscal year 2015–16. We discussed SAFE‑BIDCO’s declining net assets with its chief executive officer (CEO), and she indicated that the primary causes for the decrease included the low‑interest‑rate environment and the low amount of capital available to make loans. Because of declining loan revenue, it is likely that SAFE‑BIDCO will continue to make fewer loans than it did previously, creating a downward spiral of fewer loans and loan revenue, pushing SAFE‑BIDCO closer to insolvency.

SAFE‑BIDCO earns less per dollar for operating fee‑for‑service programs than it does for loan programs. Under its fee‑for‑service programs, SAFE‑BIDCO receives a fee for services it provides, such as reviewing loan guarantees on loans made by financial institutions, underwriting loans, or servicing loans for third parties. The fees it earns are either flat fees or percentages of the loan guarantee amounts. For example, when SAFE‑BIDCO approves a loan guarantee for the California Small Business Loan Guarantee Program, it earns a one‑time fee of 2.5 percent of the guaranteed loan amount. In comparison, when it makes a loan, SAFE‑BIDCO generally earns annual interest of 1 percent to 6.5 percent plus a variable prime interest rate on the outstanding loan balance. As a result, a loan made by SAFE‑BIDCO typically generates much more revenue than a loan guarantee. For example, if SAFE‑BIDCO reviewed and approved a $250,000 loan guarantee, it would receive a fee of $6,250. However, if it loaned $250,000 for 10 years at 6 percent annual interest, it would earn $15,000 in interest the first year as well as interest in each additional year of the loan, a total amount much more than the one‑time fee it would receive for a similar loan guarantee. SAFE‑BIDCO could generate substantially more revenue if it could make loans instead of relying on fee‑for‑service programs.

SAFE‑BIDCO needs additional capital so that it can make loans and generate enough revenue to prevent further declines in its net assets. For fiscal year 2015–16, SAFE‑BIDCO’s total revenue was $908,000, while its expenses for the year totaled $1.17 million. The largest portion of its expenses was for personnel and contracted professional services. Using the average annual decline in net assets over the past five fiscal years, we estimated that SAFE‑BIDCO will need to generate an additional $396,000 in revenue annually—with no increase in expenses—to prevent further declines in its net assets. We estimated that to produce this amount of revenue, SAFE‑BIDCO needs to make additional loans each year of $5.3 million. This estimate is based on the revenue SAFE-BIDCO could expect to generate from fees, loan sale premiums, and interest income. Our estimate includes the revenue and fees that SAFE‑BIDCO could collect if it loaned funds at a 6.25 percent interest rate. For example, at $250,000 per loan, SAFE‑BIDCO would need to make 21 additional loans each year. This amount of lending would represent a significant increase in its loan activities, as SAFE‑BIDCO made only three loans totaling $525,000 in fiscal year 2015–16. However, if SAFE‑BIDCO were to obtain, review, and manage 21 additional loans, it would likely incur additional staffing expenses caused by the increased workload and thus would need additional revenue above the $396,000 we calculated to cover those increased expenses.

In fact, SAFE‑BIDCO recently requested a significant amount of additional funding. At a December 2016 public meeting of the executive subcommittee, SAFE‑BIDCO staff reported they had submitted a budget change proposal to the State requesting $15.5 million—$15 million to use to make loans and $500,000 for additional staff. When we asked SAFE‑BIDCO’s CEO whether it was a realistic assumption that SAFE‑BIDCO could loan $15 million in one year, she stated that it could be accomplished by making larger loans of up to $750,000. She also stated that SAFE‑BIDCO turns away prospective borrowers daily because of the potential borrowers’ requested loan amounts and business locations. However, $15 million in loans in a single year would be a significant increase in SAFE‑BIDCO’s loan activity, and it would considerably exceed its loan activity in any one year over the past 10 years. Specifically, in fiscal year 2011–12, which was the fiscal year with the greatest loan activity during the past 10 years, SAFE‑BIDCO made 18 loans totaling just $3 million.

In addition to its operating expenses, SAFE‑BIDCO provides other postemployment benefits (OPEB) to its retirees and to its current employees once they retire. Specifically, SAFE‑BIDCO’s OPEB costs include postemployment health care benefits to all employees who retire from the organization on or after reaching age 65 with at least five years of service.  According to its audited financial statements, SAFE‑BIDCO pays the full amount of the monthly medical premium for the lifetime of each retired employee and dependent spouse. However, SAFE‑BIDCO has not set aside any funds for its future OPEB obligation. Its net OPEB obligation—$650,000 as of June 30, 2016—has increased by 179 percent since June 30, 2011, and its net assets as of June 30, 2016, were $1.3 million. Setting aside $650,000 for the OPEB liability would significantly limit SAFE‑BIDCO’s ability to continue to operate. Without generating additional revenue through its loan activities, SAFE‑BIDCO is unlikely to be able to fulfill its OPEB obligation to its employees and retirees.

SAFE‑BIDCO Has Been Unsuccessful in Obtaining Sufficient Additional Capital

Although SAFE‑BIDCO’s net assets have been declining for years, it has not taken sufficient steps to obtain additional capital to address the decline, allowing its net assets to continue to dwindle and pushing it closer to insolvency. It has borrowed funds to make loans, obtained grants, and sold some of its loans to raise capital. However, these efforts have not generated sufficient funds to address its decreasing net assets. Further, SAFE‑BIDCO has not attempted to obtain capital from donations or sponsorships, nor has it attempted to obtain funds to support its operations through fundraising activities—such as selling tickets for special events.

SAFE‑BIDCO has made some efforts to obtain other sources of funding, but the funds generated were not sufficient to prevent declines in SAFE‑BIDCO’s net assets. According to its audited financial statements, in December 2010, SAFE‑BIDCO entered into a $1 million promissory note with a development corporation to obtain funds to finance the guaranteed portions of the SBA loans it made. It repaid that promissory note in fiscal year 2015–16. Additionally, between 1996 and 2010, SAFE‑BIDCO received five loans from the U.S. Department of Agriculture (USDA) Rural Development totaling $2.75 million to make loans to businesses located in designated counties. It also received a $500,000 grant in fiscal year 2015–16 for its Native American Loan Program. However, these funds alone have been insufficient to resolve SAFE‑BIDCO’s financial concerns.

SAFE‑BIDCO has also raised capital by selling loans it makes, but it now has very few loans that it can sell. When SAFE‑BIDCO acts as a lender, it can typically sell the guaranteed portions of its loans to third parties because the guaranteed portions have reduced risk for the purchasers. However, SAFE‑BIDCO has made few loans guaranteed by other entities in recent years. For fiscal years 2011–12 through 2015–16, SAFE‑BIDCO sold loans and received more than $4 million in total revenue, or a little over $801,000 per year, but as of June 30, 2016, it held $2.8 million in loans. SAFE‑BIDCO’s CEO stated that it has been unable to sell the remainder of its $2.8 million in loans—$1.1 million made through the USDA Rural Loan Program—because its loan agreement with the USDA requires SAFE‑BIDCO to hold the loans as collateral for the loans the USDA made to SAFE‑BIDCO. The remaining $1.7 million was unguaranteed. SAFE‑BIDCO has attempted to sell unguaranteed loans made under its Energy Efficiency Loan Program, which total $899,000, but it has been unsuccessful. Reasons given by third parties for declining to purchase the loans include that the loans are unguaranteed, no updated financial information is available, and the third parties are not interested in these types of loans.

Despite its status as a 501(c)(3) nonprofit, SAFE‑BIDCO has not engaged in fundraising activities, such as seeking donations and sponsorships or selling tickets for special events, to help meet its need for additional capital.1 In explaining that SAFE‑BIDCO has not attempted to obtain donations, its CEO told us that she knows of no state‑affiliated organization that solicits funds. She further explained that special events can be very expensive to organize and stage. Nevertheless, given its status as a nonprofit, SAFE‑BIDCO can seek donations and raise funds. A senior loan officer at California Capital Financial Development Corporation (California Capital), a Sacramento‑based nonprofit, told us that it receives federal and state revenue for operating the SBA loan program and the California Small Business Loan Guarantee Program. These are some of the same programs SAFE‑BIDCO operates. However, unlike SAFE‑BIDCO, California Capital does seek donations and sponsorships. A program director at California Capital stated that it is supported in part through funding from foundations and financial institutions that provide donations in the form of grants and sponsorships. She stated that grant funding can specify a purpose, such as helping fund capacity building services for small businesses. She explained that these services provide small business owners with training, counseling, workshops, and other resources that businesses need to become more successful and self‑sustaining. Further, she stated that California Capital receives sponsorship funding when a donor wants to give funds for a particular program or event. According to the vice president of Valley Small Business Development Corporation, a Fresno‑based nonprofit, it obtained $1.2 million in technical assistance grants since 2011 from banks and other financial institutions for such services as providing no‑cost individualized business counseling focusing on loan readiness and financial troubleshooting. The business services director for the Napa‑Sonoma Small Business Development Centers, a nonprofit that provides business counseling services to small businesses in the same geographic region as SAFE‑BIDCO and that receives funding from some of the same entities, such as the SBA, noted that it operates workshops for small businesses that are partially funded by participant fees or bank sponsorships. She also noted that it holds the workshops in a variety of places, including local chambers of commerce, which donate space for the events. Because SAFE‑BIDCO is not engaging in fundraising efforts such as soliciting donations as similar organizations do, it is missing out on potential sources of additional capital.

Finally, SAFE‑BIDCO has been unsuccessful in obtaining funding from the State. As discussed earlier, SAFE‑BIDCO noted at its December 2016 public executive committee meeting that it had submitted a budget change proposal to the State requesting $15.5 million. According to the CEO, she had made multiple efforts to obtain financing in past years by reaching out to legislators, legislative staff, members of the board, the Department of Business Oversight, and Department of Finance (Finance) staff. She also stated that her first efforts started in 2000 and consisted of in‑person meetings and telephone conversations. However, only after she spoke in 2016 with a program budget manager at Finance, who directed her to submit a budget change proposal directly to Finance, did SAFE‑BIDCO formally request additional funding from the State.

The CEO told us about SAFE‑BIDCO’s plan to borrow funds from a private organization based in San Jose that intends to raise money under the federal EB‑5 Immigrant Investor Program (EB‑5 Program), which allows foreign nationals to obtain residence status in the United States in exchange for investments in the United States that create jobs. Under the proposed plan structure, the private organization would employ brokers to seek foreign nationals wishing to make investments in exchange for residence status. Once a broker obtains a foreign investment that is approved by the federal government, the private organization would lend the funds to SAFE‑BIDCO at a 3 percent interest rate. SAFE‑BIDCO would be able to use the funds it borrows as needed to make loans. According to the CEO, as of the end of January 2017, the proposed structure of the plan had not yet been approved by the federal government. She also stated that she does not know when the federal government might approve the plan. However, the EB‑5 Program is scheduled to expire on April 28, 2017. Although the program has been reauthorized regularly since 1990, a bill was introduced in January 2017 in the U.S. Senate that would end the EB‑5 Program. A statement by a senator cosponsoring this legislation noted some specific examples of fraud occurring under the program and indicated that the program has been rife with national security weaknesses. Therefore, it is unclear whether this federal program will continue. Additionally, because the federal government has not approved the formal plan to obtain funds through the EB‑5 Program and because SAFE‑BIDCO’s access to such funds has no formalized timeline, it is premature and imprudent for SAFE‑BIDCO to rely on this funding for its future operations.

SAFE‑BIDCO Made Questionable Spending Decisions About Contractors and Out‑of‑State Travel

SAFE‑BIDCO did not significantly reduce its expenses over the past five years, even though it brought in less revenue over this period than it had generated previously. SAFE‑BIDCO’s annual revenue declined by about $300,000, from $1.2 million in fiscal year 2011–12 to $908,000 in fiscal year 2015–16. In contrast, it reduced its expenses by only about $200,000, from roughly $1.4 million in fiscal year 2011–12 to roughly $1.2 million in fiscal year 2015–16. Given SAFE‑BIDCO’s declining net assets, we expected that it would attempt to reduce its expenses to bring them in line with its revenue, but it has not done so. Instead, it has imprudently spent its limited funds on questionable activities.

As shown in Figure 3, SAFE‑BIDCO has a small staff of seven employees, and it uses contractors for many of its services. However, we question the prudence of using its limited resources for two of its contractors. Specifically, the primary responsibility of SAFE‑BIDCO’s business development contractor is to develop leads for the California Small Business Loan Guarantee Program. SAFE‑BIDCO began contracting with him in February 2011 and has renewed his services for each fiscal year since then. For fiscal years 2011–12 through 2015–16, we estimated the business development contractor generated $586,000 in fees and interest income, or $117,000 per year, on average. However, SAFE‑BIDCO paid the contractor $471,000 over those five years, or $94,000 per year. Thus, the contractor generated only $115,000 in revenue in excess of the amount SAFE‑BIDCO paid him for the five‑year period, or about $23,000 per year. This low return on investment is problematic given SAFE‑BIDCO’s declining assets.

When we discussed with the CEO our cost‑benefit analysis of the business development contractor, she stated that the contractor does more work than implied by the amount of loans generated because many loans do not come to fruition. She also stated that the contractor is good at what he does because he knows a lot about credit and that he can review the credit of borrowers and know whether to continue with the borrowers. She indicated that he was more efficient in this area than were previous business development contractors. However, the business development contractor did not meet the performance milestones specified in his contracts for fiscal years 2012–13 through 2015–16. His contract for fiscal years 2012–13 through 2014–15 identifies that he was to produce $30 million in loan guarantee packages and $2.5 million in other loans, and he was to conduct 16 speaking engagements or bank presentations annually. For fiscal year 2015–16, SAFE‑BIDCO amended the contractor’s performance milestones to focus on his generating $300,000 in income from loan guarantee fees.

SAFE‑BIDCO continued to use this business development contractor, even though he did not achieve the goals for the loans and loan guarantees in any of the fiscal years we reviewed, only reaching a maximum of $395,000 in loans in fiscal year 2012–13 and nearly $12 million in loan guarantees in fiscal year 2013–14. Additionally, in fiscal year 2015–16, he did not meet his milestones, generating only 44 percent of the goal, or $133,000 in fee income.

Given SAFE‑BIDCO’s financial position, we expected that SAFE‑BIDCO would closely track the business development contractor and compare his performance to the milestones in his contract because he is SAFE‑BIDCO’s key individual responsible for developing business under the Small Business Loan Guarantee Program. We expected that when the contractor did not meet these milestones, SAFE‑BIDCO would open a search for a contractor who could provide better performance to meet SAFE‑BIDCO’s business development needs. However, SAFE-BIDCO did not do so. The CEO stated that since hiring the contractor, loan fees from banks have steadily increased, and loan guarantees have increased somewhat. However, the CEO also noted that the guarantee fees charged to banks have increased from 1 percent to 2.5 percent. This change in guarantee fees could also explain, in part, the rise in total fees collected. 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.

Consultant’s Scope of Work

  1. Provide research, analysis, and recommendations related to SAFE-BIDCO’s business development objectives and the possible expansion of its funding and mission to include the authority and financial resources to enable it to provide small business financing assistance for water conservation and greenhouse gas emission reduction projects.

  2. Advise and consult with SAFE-BIDCO in identifying and prioritizing meetings and discussions with appropriate state officials and other interested parties about its business development objectives and expanded mission and funding.

  3. Assist SAFE-BIDCO, upon request, in scheduling meetings with appropriate officials in state government.

  4. Meet periodically with SAFE-BIDCO management and the board of directors to report on progress and actions undertaken to meet its business development objectives.

  5. Provide as needed the lobbying services approved or authorized by the board.

Source: SAFE-BIDCO’s contract with the consultant.

The second consultant whose hiring we question was contracted in fiscal year 2015–16 to help SAFE‑BIDCO carry out tasks related to its educational and marketing goals and objectives. The consultant’s scope of work specified the activities outlined in the text box. Under the agreement, SAFE‑BIDCO paid the consultant $6,000 per month for 10 months, or $60,000. We noted that SAFE‑BIDCO did not seek competitive bids for his services. Additionally, given SAFE‑BIDCO’s financial condition and the fact that five of its nine board members are appointed by the Governor or Legislature, we expected that SAFE‑BIDCO board members would contact state officials directly regarding funding rather than hire a consultant to perform this work.

According to the board meeting minutes for September 2015, the board and the consultant discussed the potential for expanding the scope of SAFE‑BIDCO and the possibility of accessing other funding sources. Additionally, they discussed potential opportunities related to the Clean Energy and Pollution Reduction Act of 2015, which established requirements to increase procurement of electricity from renewable sources and to double the energy efficiency savings in electricity and natural gas end uses. In a later meeting in March 2016, the consultant reported that he introduced SAFE‑BIDCO to legislators whom he thought might be able to assist SAFE‑BIDCO in acknowledging the use of SAFE‑BIDCO as the instrument to provide financing to disadvantaged communities for water conservation and energy efficiency projects. In May 2016, in the consultant’s summary report of activities, he recommended that SAFE‑BIDCO develop a budget change proposal to request state funding and to ensure that SAFE‑BIDCO submits the proposal on time. His second recommendation was for SAFE‑BIDCO to develop a strategic plan. The analysis in the summary report of activities also states that the board might wish to consider inviting the California State Auditor to meet with members to discuss the questions that SAFE‑BIDCO should be prepared to answer from Finance and legislative staff regarding its operations and business model. We began this audit following the Joint Legislative Audit Committee’s approval in August 2016. Although the recommendations from the consultant might have been helpful for SAFE‑BIDCO, 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.

SAFE‑BIDCO’s mission is to act as a catalyst for economic development in California by serving as a nontraditional financing source providing access to alternative loan programs for small businesses that are in markets currently underserved by traditional lending institutions. However, SAFE‑BIDCO spent a portion of its dwindling assets on questionable travel, including out‑of‑state travel and one international trip. For fiscal years 2011–12 through 2015–16, SAFE‑BIDCO’s average annual travel expenses totaled more than $28,000, with a high of nearly $36,000 in fiscal year 2012–13. The CEO’s travel expenses included costs for her attendance at conferences and meetings. When we asked the CEO how she has chosen which conferences to attend, she stated that given SAFE‑BIDCO’s inability to secure state funding, she has been researching opportunities with federal programs. She also said that SAFE‑BIDCO benefits from her networking during out‑of‑state travel. Specifically, she believes that her travel has resulted in referrals to some of its loan programs and an increase in USDA grant funding for SAFE‑BIDCO’s Native American Loan Program, USDA Rural Loan Program, and USDA Rural Microentrepreneur Assistance Program. However, we noted that SAFE‑BIDCO has received funding and worked with the USDA for more than 10 years.

Further, SAFE‑BIDCO increased its travel budget in three of the five fiscal years we reviewed, and SAFE‑BIDCO also exceeded its budget for travel expenses in three of these five fiscal years. This might have occurred because, according to the CEO, she does not consider the budget when making travel plans. Instead, she chooses conferences to attend based on SAFE‑BIDCO’s current projects, the legislators or speakers in attendance, the presentations about program updates or changes, and the presentations from organizations with similar structures. The CEO stated that she finds it helpful to hear what others have done and to attend trainings on different operating procedures. Regardless, while exercising her discretionary authority over which conferences to attend and how to manage SAFE‑BIDCO’s travel budget, the CEO has a fiduciary duty to protect SAFE‑BIDCO’s assets.

During fiscal years 2011–12 through 2015–16, the CEO made 16 out‑of‑state trips, more than half of which were to Washington, D.C. She also made one international trip to Ireland. The expenses for these trips totaled more than $43,000. Figure 5 displays the numerous out‑of‑state trips made by the CEO and paid for by SAFE‑BIDCO. Given SAFE‑BIDCO’s 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 CEO’s quantity of out‑of‑state travel.

Figure 5
SAFE-BIDCO’s Chief Executive Officer Made 17 Trips to Destinations Outside of California During
Fiscal Years 2011–12 Through 2015–16

Figure 5 is a map displaying the out-of-state travel by the chief executive officer.

Source: SAFE-BIDCO’s expense reports for fiscal years 2011–12 through 2015–16.

The CEO took a trip to Dublin, Ireland, to attend a conference in June 2013. The expense logs for the trip show that SAFE‑BIDCO paid $5,900 for the conference fee, travel, lodging, and other related expenses. According to the description in SAFE‑BIDCO’s expense log, the purpose of the trip was for marketing and meetings related to the EB‑5 Program. As explained earlier, the EB‑5 Program allows foreign nationals to obtain residence status in the United States in exchange for investments that create jobs. Other expense logs and documentation for this trip show that the CEO attended a one‑day conference on the subject of the development of a small island in the northwest corner of Europe, from its origins to its leading role in business, digital, and social media. When we asked the CEO about this trip, she stated that a board member at the time had asked her to support his business activity by attending the conference in Ireland held by an Internet marketing organization he owns. The former board member told us that he did not recall the exact conversation but that he saw SAFE‑BIDCO’s attendance as a valid opportunity for it to expand its footprint, because its digital marketing was lacking. Although the CEO stated that the board member asked her to attend, she also said that the trip gave her an opportunity to collect information on the EB‑5 Program. However, the description for the conference does not include any reference to the EB‑5 Program, and the conference was not related to small businesses in California. We, therefore, question the prudence of the CEO’s trip to Ireland. Although the trip’s total cost may be small in comparison to SAFE‑BIDCO’s overall budget for the year in which the trip occurred, this kind of spending raises questions about SAFE‑BIDCO’s efforts to do all it can to reduce its expenses.

Further, the CEO attended a total of three conferences organized by the former board member’s Internet marketing organization, giving the appearance that the board member personally benefited from his position on SAFE‑BIDCO’s board of directors. During the time this individual was a board member, SAFE‑BIDCO made payments to his Internet marketing organization of $10,000 for the CEO to attend these three conferences, including $3,000 for the one in Ireland and $7,000 for two other conferences in Washington D.C. Additional travel‑related expenses for these three trips and for two conferences in Las Vegas totaled more than $7,100. Board members and SAFE‑BIDCO’s CEO are fiduciaries of SAFE‑BIDCO when participating in the management of the corporation or when exercising discretionary authority. By having SAFE‑BIDCO pay for these conferences that provided questionable benefit to SAFE‑BIDCO and that personally benefited a sitting board member, the board member and the CEO violated their fiduciary duties and directed funds to the board member’s business that could have gone toward aiding small businesses in California.

In addition, we reviewed the board member’s statement of economic interests to determine whether he disclosed his financial interests in the Internet marketing organization to which SAFE‑BIDCO made payments. Although SAFE‑BIDCO’s conflict‑of‑interest code requires its board members to disclose financial interests in compliance with the Political Reform Act of 1974 by filing statements of economic interests annually and within 30 days of assuming or leaving office, this board member failed to disclose in any of his required statements any reportable economic interests. Although the board member stated that he recalls asking the Fair Political Practices Commission how to deal with SAFE‑BIDCO’s involvement in attending events for his business, he did not correctly disclose his financial interests. He also noted that he did not vote on the CEO’s attending these events, nor did he make such a decision. Our review of SAFE‑BIDCO’s board meeting minutes did not reveal any instances in which the board voted to approve the CEO’s attendance at the board member’s conferences. Nevertheless, by failing to disclose the information, the board member did not comply with state law designed to ensure the disclosure of potential conflicts of interests.

A Lack of Oversight and Insufficient Tracking of Program Performance Obscured the Issues Now Facing SAFE‑BIDCO

SAFE‑BIDCO receives oversight at the state level by the Department of Business Oversight (Business Oversight). Although we were able to obtain and review Business Oversight’s annual examination reports of SAFE‑BIDCO since 2011, state law prevents us from disclosing the content of the reports without Business Oversight’s release of those reports. We requested that Business Oversight release the reports, but it declined to do so. Its board of directors also directly oversees SAFE‑BIDCO. However, board oversight has been hampered by limited participation by the board in its subcommittees and ineffective reports prepared by SAFE‑BIDCO.

State law specifies that Business Oversight is responsible for performing annual examinations of the entities it licenses to provide lending services, including SAFE‑BIDCO. According to an overview of its examination process, the purpose of Business Oversight’s periodic examinations is to determine the condition of a licensee—such as SAFE‑BIDCO—and to require management to take steps to correct weaknesses or unsafe and unsound conditions. Business Oversight’s reviews gather information about a licensee’s current asset condition, ability to meet the demands of creditors, adequacy of capital structure, earnings performance and future prospects, level of competency of management, and the extent of compliance with applicable laws and regulations. The function of the examinations is also to identify weaknesses in safeguards and internal routines, and controls and to obtain a commitment from management to correct any noted deficiencies. Business Oversight’s examiners evaluate specific areas of a licensee, including its capital adequacy, asset quality, management, earnings, and liquidity and funds management. Based on evaluations of these areas, the examiner determines the overall condition of the licensee and provides an overall rating of strong, satisfactory, less than satisfactory, or unsatisfactory.

Business Oversight conducted annual examinations of SAFE‑BIDCO for fiscal years 2011–12 through 2015–16. However, state law specifies that examinations prepared by Business Oversight are confidential. We believe a reasonable interpretation of the law allows Business Oversight to publish its reports if it so chooses, making the report available to the public. We asked Business Oversight whether it would publish its reports on SAFE‑BIDCO so that we could better describe Business Oversight’s efforts to provide oversight to SAFE‑BIDCO. Business Oversight declined to do so.

Annual financial audits provide another form of oversight. SAFE‑BIDCO obtains annual audits of its financial statements from an independent public accounting firm that furnishes verified financial information to its management. We reviewed these audit reports for the past five fiscal years, and we noted that the independent auditor had concluded in each report that the financial statements were fairly and appropriately presented. The independent auditor did not report any findings relating to reviews of SAFE‑BIDCO’s compliance with federal programs. Moreover, the independent auditor did not include a going concern disclosure in its opinions for the last five years. Under generally accepted accounting principles, an auditor includes a going concern disclosure when it has substantial doubt regarding an entity’s ability to continue as a going concern when conditions and events, considered in the aggregate, indicate the probability that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued.  Even our worst‑case projection estimated that SAFE‑BIDCO could continue operations for at least 12 months from its June 30, 2016, financial audit. Thus, despite its declining financial position, SAFE‑BIDCO has not met the criteria to warrant a going concern disclosure. However, SAFE‑BIDCO’s financial statements still provide the statements’ users and reviewers, including board members and such oversight agencies as Business Oversight, with information about SAFE‑BIDCO’s financial condition. Reviewers of SAFE‑BIDCO’s financial statements can clearly see the organization’s declining financial position and can use the information for their decision making.

SAFE‑BIDCO’s nine‑member board is the body that is primarily responsible for overseeing the organization’s operations. However, the board is hampered by its members’ limited involvement in its subcommittees and the lengthy, duplicative reports that staff members prepare and provide to the board. In our review of the board’s meeting minutes, we noted that the board uses the work of three subcommittees—the executive, audit, and investment subcommittees—to inform its decision making. Subcommittees can be useful in helping a board address its responsibilities, but only four of SAFE‑BIDCO’s nine board members—the three regional board members and one of the six appointed members—sit on these subcommittees. Except in the case of the executive subcommittee, whose membership is defined in SAFE‑BIDCO’s bylaws, board members volunteer to serve on these subcommittees. Figure 6 shows the current subcommittee makeup. In fiscal year 2015–16, the full board met quarterly to conduct board business and hear updates and recommendations regarding subcommittee activities. The subcommittee meetings included important discussions regarding SAFE‑BIDCO’s financial condition and future plans. Typically, the executive subcommittee reviews the agenda and acts on matters specifically referred to it by the board. The audit subcommittee reviews annual independent audits, internal financial statements, records, and procedures to ensure prudent and sound financial management. The investment subcommittee provides direction to investment staff regarding portfolio diversification, economic outlook, and overall risk management. Because generally only one of the appointed members of the board participates actively in these subcommittees, the board is missing an opportunity to provide SAFE‑BIDCO with the full range of its members’ experience and expertise, and only a few of the board members are heavily involved in the guidance of the organization.

Figure 6
Only Four of Nine SAFE-BIDCO Board Members Serve on Board Subcommittees

Figure 6 is a graphic displaying membership on SAFE-BIDCO subcommittees.

Source: Only Four of Nine SAFE-BIDCO Board Members Serve on Board Subcommittees.

SAFE‑BIDCO Should Consolidate and Streamline Its Reports to the Board

The primary methods SAFE‑BIDCO uses to report to its board are memos, reports, and other information prepared by staff and compiled into board packets provided to the board members in advance of each quarterly board meeting. However, information provided in the packets should be better structured to provide critical information to board members. SAFE‑BIDCO’s board packets contain information including the current meeting’s agenda, committee and board meeting minutes from the previous meeting, a compilation of memos to the board, and numerous financial reports. SAFE‑BIDCO has changed the types of financial reports over the years, but the packets have consistently included a summary from its chief financial officer, the most recent financial statements, investment reports, budget‑to‑actual summary and comparative operating data, loan loss reserve evaluations, fee‑for‑service reports, and loans in process. According to the CEO, when board members request new information, SAFE‑BIDCO develops a new report, and it continues to include the report in the board packet unless told otherwise by the board. As a result, the board packets have become voluminous, and the packets’ comprehensive nature has sometimes limited the usefulness of information provided. In fact, board packets for fiscal year 2015–16 averaged more than 90 pages.

Although providing extensive information may be useful, board members do not always have sufficient time to review their packets before board meetings. When we discussed board members’ sometimes receiving their packets within 24 hours of the meeting, the CEO explained that the shortage of staff—including the loss of the board secretary in November 2014—has challenged SAFE‑BIDCO’s ability to meet routine daily deadlines. She stated that managing day‑to‑day activities with novice administrative staff is a challenge and has translated into delays. She acknowledged that the board members had received their materials later than usual during the past year. Given the size of the packet and the short time for review, the ability of a board member to provide meaningful oversight at a quarterly meeting is limited. Consolidating duplicative information and reducing the size of the packets could also help ease the burden on staff who prepare the packets.

Further, the reports SAFE‑BIDCO provides its board members have not consistently tracked or compiled relevant data related to its goals, thus limiting the board’s ability to assess SAFE‑BIDCO’s performance. Although SAFE‑BIDCO has established various goals, the organization’s reports do not explain how these goals are related. For example, SAFE‑BIDCO’s fiscal year 2014–15 budget listed a revenue goal of generating $66,000 in premiums for selling SBA loans. Another report listed a goal of making $839,000 in SBA loans in fiscal year 2014–15. However, the reports fail to explain whether making $839,000 in SBA loans would help achieve SAFE‑BIDCO’s revenue goal of generating $66,000 in premiums from selling SBA loans. Without clearly explaining the relationships among various goals, SAFE‑BIDCO cannot assure the board members and other stakeholders that its goals are appropriate.

Although SAFE‑BIDCO prepares multiple types of goal reports for its board, it could better demonstrate that it is allocating its resources effectively and eliminating redundant information by compiling a single unified report containing goals and production for all of its programs. As shown in Table 2, SAFE‑BIDCO provides to its board four separate reports containing program performance information, but it does not assemble a single unified report tracking all individual loan program and fee‑for‑service production and goals. SAFE‑BIDCO’s CEO stated that individual program goal and performance tracking is already contained in a report prepared for the board. However, as we discuss above, the reports SAFE‑BIDCO provided do not contain the relevant details connecting the goals, limiting the ability of the board to assess SAFE‑BIDCO’s performance.

Table 2
SAFE-BIDCO Has Presented Multiple Reports to Its Board of Directors, but the Reports Have Failed to Track Its  Performance Clearly
Fiscal Years 2011–12 Through 2015–16
    Reports by SAFE-BIDCO Performance Goals That SAFE-BIDCO’s Reports Track
Goals for Individual Loan Programs Goals for SAFE-BIDCO
as an Organization
Goal for Loan Volume Compared to Actual Loan Volume* Goal for Loan Program Revenue Compared to Actual Revenue* Loan Volume Needed to Reach Revenue Goals Goal for Loan Guarantee Fees Compared to Actual Loan Guarantee Fees Goal for Loan Volume Compared to Actual Loan Volume Goal for Fee‑for‑Service Revenue Compared to Actual Revenue
SAFE-BIDCO budget No Yes No Yes No Yes
Direct Pipeline Summary report Yes No No no Yes no
Goal Comparison report No No No Yes Yes no
Guarantees Booked report§ No No No no No no

Source: SAFE-BIDCO reports presented in agenda packets to its board of directors.

* Loan volume refers to the total dollar value of loans that SAFE-BIDCO actually made. For example, if SAFE-BIDCO made 10 loans totaling $10 million, the loan volume would be $10 million. Loan program revenue refers to the amount of revenue earned by SAFE-BIDCO on the loans it made.
The Direct Pipeline Summary report presents the number of potential loans, loans in process, and actual loans made for the fiscal year. This report also presents the loan volume goal by program.
SAFE-BIDCO began preparing this report in fiscal year 2014–15. Although this report does not list all individual loan programs, it does have a separate goal category for its Native American Loan Program.
§ The Guarantees Booked report presents the actual loan guarantee volume, but it does not compare this amount to any goals.


SAFE‑BIDCO’s CEO explained that the board’s preference for specific levels of detail in the reports has changed over time. For example, according to the CEO, SAFE‑BIDCO staff created a new report when the board requested information regarding the production activity for SAFE‑BIDCO’s two programs that produce the highest income.  However, the information in that report, provided as a memo in the board of directors’ packages, contains duplicate information that is already included in other reports the board has continued to receive. For example, a loan volume goal included in SAFE‑BIDCO’s loan report was also included in the new report. Additionally, the new report lists a goal for loan sale premiums that SAFE‑BIDCO’s budget also includes. SAFE‑BIDCO should not limit itself to providing just what the board requests and should consider how to most effectively present the information. By preparing a single report containing goals and production for its programs, SAFE‑BIDCO can avoid redundant information and better demonstrate to its board that it is allocating its limited resources effectively among the programs and services it provides to its clients. A consistent, consolidated report could also help SAFE‑BIDCO readily provide information on its successes in its efforts to obtain additional sources of capital.

SAFE‑BIDCO also has established qualitative goals in its strategic plan, but it does not report on how well it is meeting most of them to the board. For example, none of SAFE‑BIDCO’s reports assess how well it is achieving the goals of advocating for small business finance, providing high‑quality customer service, and implementing lending programs valued by lenders and clients.

Adding a Supervisory Review of Its Loan Files Would Help Ensure That SAFE‑BIDCO Is Complying With Loan Program Requirements

SAFE‑BIDCO lacks policies and procedures for supervisory review of loan files. Establishing such policies and procedures would help it ensure that reports to the board are accurate and that SAFE‑BIDCO is lending funds or guaranteeing loans according to the loan programs’ requirements. We reviewed the loan files for a selection of loans and loan guarantees processed by SAFE‑BIDCO’s staff to determine whether they complied with selected program requirements. Specifically, we reviewed two loans or loan guarantees for each of the seven programs that SAFE‑BIDCO operated during fiscal years 2011–12 through 2015–16. SAFE‑BIDCO did not make any loans under its Agricultural Loan Program during this period. As shown in Table 1, SAFE‑BIDCO made 54 loans and 102 loan guarantees during those five fiscal years.

We identified three errors in the 14 files reviewed, but these errors could have been prevented if SAFE‑BIDCO had established a consistent review process for its loan files. For one of the two loan guarantees we reviewed under the California Small Business Loan Guarantee Program, SAFE‑BIDCO promised in April 2014 a 10‑year guarantee, yet the program’s maximum allowable duration for a guarantee is seven years. As a result, SAFE‑BIDCO could be liable to pay the guaranteed amount of the loan if the borrower defaults on the loan after seven years. After we brought this matter to SAFE‑BIDCO’s attention, it contacted the bank that made the loan to inform it of the error.

We also noted one error in two of the loan files we reviewed for the Replacing, Removing, or Upgrading Underground Storage Tanks (RUST) Program. Specifically, under its contract with the State Water Resources Control Board (State Water Board), SAFE‑BIDCO packages loans and submits them to the State Water Board for funding consideration. According to its contract, SAFE‑BIDCO is paid a loan packaging fee of $1,000 and receives 1 percent of the funded loan amount, but it is prohibited from charging other fees or interest. Nevertheless, in November 2013, SAFE‑BIDCO charged an application fee of $275 for one of the two RUST loan files we reviewed. SAFE‑BIDCO’s CEO agreed that SAFE‑BIDCO should not have charged the fee, and she did not know why it had done so.

For one of the two Native American Loan Program loans we reviewed, we found no evidence in SAFE‑BIDCO's loan file demonstrating that before issuing the loan in April 2013, SAFE‑BIDCO had verified that the borrower met the tribal member requirements specified in its program plan criteria. Because this program is intended to benefit tribal members who might have more difficulty than others in obtaining capital from traditional lenders, SAFE‑BIDCO's program eligibility requirements state that businesses must be at least 51 percent Native American‑owned. After we brought this issue to SAFE‑BIDCO's attention, it obtained evidence that the primary borrower was a tribal member.

Because of the errors we noted, we asked SAFE‑BIDCO's CEO whether SAFE‑BIDCO has a policy or practice that every loan file receive a review by a second employee. She said that SAFE‑BIDCO's general practice is for the senior credit officer to review each loan file. However, she noted that SAFE‑BIDCO has no formal review documented by signatures. We discussed with the CEO whether creating a formal supervisory review process would be a good idea to ensure that SAFE‑BIDCO's loan files comply with program requirements. She stated that she believes such a practice is unnecessary given her staff's experience in processing loans. She also indicated that large loans must be reviewed and approved by the loan committee. Additionally, she noted that outside entities already review some of the loans. For example, the California Infrastructure and Economic Development Bank, also known as IBank, reviews loan guarantees made by SAFE‑BIDCO under the California Small Business Loan Guarantee Program. However, because not all programs SAFE‑BIDCO operates undergo an external review, and because not all loans are reviewed by the loan committee, it is important that SAFE‑BIDCO establish a supervisory review process to ensure compliance with requirements. SAFE‑BIDCO's CEO indicated that establishing a supervisory review process for its programs would not be practical given its limited staffing. However, SAFE‑BIDCO's loan volume for fiscal year 2015–16 consisted of three loans and 22 guarantees, or roughly two loans or guarantees per month. Because of the low number of approved loans and loan guarantees, it should not be onerous for SAFE‑BIDCO to conduct a supervisory review of all loans and loan guarantees it approves. By establishing a documented supervisory review process, SAFE‑BIDCO could help ensure that it has gathered sufficient documentation to demonstrate that the loans and guarantees it makes are consistent with individual program requirements.

Restructuring SAFE‑BIDCO Could Address Operational Concerns and Allow It to Continue Serving Small Businesses

To continue to operate its programs to provide financing assistance to California’s small businesses, SAFE‑BIDCO needs additional capital. However, as discussed earlier, we are concerned with several aspects of its operations. Therefore, we are reluctant to recommend that the Legislature appropriate funding to SAFE‑BIDCO as it is currently structured. Despite the continuous decline of available capital to make loans, SAFE‑BIDCO has spent more than it has earned in each of the last five fiscal years, has made questionable spending choices, and has been unsuccessful in obtaining sufficient additional capital. In its current form, SAFE‑BIDCO has limited state oversight through annual examinations of its lending services, and its board is hampered by the limited number of board members who actively participate in its subcommittees and by the voluminous and sometimes duplicative information reported in the board packets. Therefore, if the State appropriates funding, SAFE‑BIDCO should undergo organizational changes to address these concerns and to maximize the use of any funding received. Table 3 outlines several options that the Legislature could pursue to address our concerns.

Table 3
Benefits and Costs to the State of Legislative Options to Restructure SAFE-BIDCO
Legislative Option Benefits Costs
Establish SAFE-BIDCO as a program within an existing state department.

The State takes over SAFE‑BIDCO’s operations.
  • The State continues SAFE-BIDCO’s mission to provide financial assistance to California’s small businesses through access to various alternative loan programs.

  • The designated state department has direct oversight and control of SAFE-BIDCO’s operations.

  • SAFE-BIDCO’s operations are subject to state requirements for competitive bidding of contracts.
  • The designated state department would need annual funding to support its operations and the lending programs taken over by the State.

  • The State might need to take on SAFE BIDCO’s existing obligations.
Appropriate funding to SAFE-BIDCO and require direct reporting to the Legislature on its performance.

SAFE-BIDCO receives an appropriation. The Legislature requires SAFE-BIDCO to report annually on its performance.
  • SAFE-BIDCO continues its mission to provide financial assistance to California’s small businesses through access to alternative loan programs.

  • SAFE-BIDCO receives increased oversight through its direct reporting to the Legislature.
  • The State appropriates funding to SAFE‑BIDCO to make loans to small businesses.

  • The State would have limited assurance that its investment would be used efficiently to benefit small businesses.

  • SAFE-BIDCO’s reporting on its performance annually would not prevent day-to-day management concerns similar to those identified in our audit, including imprudent spending on travel and contractors.
Take no action.

The Legislature leaves SAFE-BIDCO as is.
The State receives no additional benefits.   SAFE-BIDCO might eventually become unable to continue its mission to assist small businesses with financing.
Dissolve SAFE-BIDCO.

The Legislature enacts legislation to dissolve SAFE-BIDCO.
The State receives no additional benefits.
  • The State is likely to incur costs to wind down SAFE-BIDCO, such as those related to transferring loans and loan programs to other entities.

  • Dissolving SAFE-BIDCO would terminate health benefits for current employees and retirees.

Sources: California State Auditor’s analyses of SAFE-BIDCO’s operations and of relevant laws and regulations.

Of these options, the one that would best address our concerns would be for the Legislature to establish SAFE‑BIDCO as a program within an existing state department that already performs similar activities. Doing so would enable the State to continue to support financial assistance for small businesses and to have direct oversight of and control over SAFE‑BIDCO’s operations. Instead of a board of directors that manages SAFE‑BIDCO’s activities, the chosen state department would manage SAFE‑BIDCO’s programs, control the tracking of program performance, and ensure that adequate information is reported. State employees seeking contracted services for SAFE‑BIDCO’s programs would be subject to such state contracting policies as competitive bidding. As a result, this transfer should help control costs and increase oversight.

If it moves SAFE‑BIDCO under a state department, the Legislature should not transfer all of SAFE‑BIDCO’s functions. Of its eight programs, only two—the Energy Efficiency Loan Program and the Native American Loan Program—are exclusive to SAFE‑BIDCO and could provide a unique benefit if continued. Each of these two programs is designed to aid a specified community and could be implemented statewide. As for the other six programs, SAFE‑BIDCO’s Rural Loan Program is funded through a low‑interest federal loan from the USDA and could be transferred to either the chosen state department or to a nonprofit organization. In addition to SAFE‑BIDCO, other local organizations operate the California Small Business Loan Guarantee Program and RUST Program for the State and so it would be unnecessary for a state entity to operate them. A state department contracts with 11 organizations located throughout the State to review RUST Program loan applications. Another state department contracts with nine organizations throughout the State to operate the California Small Business Loan Guarantee Program. SAFE‑BIDCO’s remaining three programs—SBA loans, microloans, and agricultural loans—are offered by many other entities. SBA has identified more than 20 other participating lenders in Northern California alone as preferred participating lenders for SBA loans to start‑up businesses as well as seven organizations that specifically provide microloans. The USDA Farm Service Agency lists nearly 60 organizations in California that provide the same federally backed agricultural loans that SAFE‑BIDCO offers. Therefore, small businesses could seek assistance with loans from other, similar entities if SAFE‑BIDCO no longer operates these programs.

We reviewed several state departments as possible options to house SAFE‑BIDCO’s operations and identified the State Treasurer’s Office (Treasurer’s Office) as the best fit to take on SAFE‑BIDCO’s role because it currently provides some similar lending assistance services. In particular, the California Pollution Control Financing Authority (CPCFA), chaired by the State Treasurer, manages the California Capital Access Program (CalCAP), which assists small businesses in obtaining financing from lenders by insuring loans made to small businesses enrolled in this program. Although CalCAP does not offer direct loans, the Treasurer’s Office operates other programs that provide direct lending. The executive director of CPCFA stated that the Treasurer’s Office is committed to ensuring that small businesses in California have access to capital and to support high‑quality, sound lending practices. She told us that the Treasurer’s Office believes that a review of state agencies, existing lenders, organizations, and networks would identify an agency or entity capable of taking on SAFE‑BIDCO’s programs. Further, she stated that the Treasurer’s Office would be willing to administer those programs if no existing agency or organization can readily do so, if adequate capital and administrative funding and resources are provided. Notwithstanding its belief that a review would find another agency or entity capable of taking on SAFE‑BIDCO’s programs, we identified the Treasurer’s Office as the best fit to take on SAFE‑BIDCO’s role. Finally, reporting on the success of SAFE‑BIDCO’s programs is critical for the Legislature to make decisions regarding this nonprofit organization. Thus, SAFE‑BIDCO should report to the Legislature even if it does not become part of a state department.



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 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.


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

Regardless of whether the Legislature establishes SAFE‑BIDCO as a program within a state entity, it should do the following:


Other Areas We Reviewed

To address the audit objectives that the Joint Legislative Audit Committee approved, we reviewed the subject areas shown in Table 4. In the table, we indicate the results of our review and any associated recommendations we made that are not discussed in other sections of this report.

Table 4

Other Areas Reviewed as Part of This Audit

SAFE‑BIDCO’s Access to California Public Employees’ Retirement System (CalPERS) Benefits
  • The Joint Legislative Audit Committee directed us to determine whether SAFE-BIDCO employees are considered to be state employees for the purposes of health and retirement benefits through CalPERS.

  • SAFE-BIDCO received approval to obtain health benefit coverage for its employees through CalPERS beginning in June 1989. In December 2015, SAFE-BIDCO requested to participate in the CalPERS retirement plan. CalPERS denied the request in March 2016, stating that SAFE-BIDCO had not demonstrated its eligibility to participate. In April 2016 SAFE-BIDCO appealed the decision. As of March 2017, the appeal is still pending.

  • With limited exceptions, state employees become members of CalPERS upon being hired. SAFE-BIDCO staff are not state employees for the purposes of CalPERS because their salaries do not come directly from the state treasury, among other reasons. However, state law allows certain other public agencies to contract with CalPERS for health and retirement benefit coverage and specifically lists SAFE-BIDCO as a potential contracting agency. To qualify as a public agency for participation in the CalPERS retirement system, state law requires SAFE-BIDCO to obtain a written advisory opinion from the U.S. Department of Labor (Labor) stating that SAFE-BIDCO is an agency or a political subdivision of the State and its participation would not adversely affect CalPERS as a “governmental plan” under federal law. SAFE-BIDCO provided a copy of its request for an advisory opinion to Labor dated June 2004 and a copy of Labor’s response dated September 2008, which states that Labor was not issuing any opinions pending new guidance expected from the U.S. Internal Revenue Service (IRS). The response letter also states that SAFE-BIDCO is encouraged to resubmit its request if it has questions after the final guidance is issued. However, as of February 2017, the IRS had not issued the expected final guidance. Partly because SAFE-BIDCO had not obtained the required advisory opinion from Labor, CalPERS denied SAFE-BIDCO’s participation in the CalPERS retirement plan.
Money at California Infrastructure and Economic Development Bank (IBank)
  • According to correspondence between SAFE-BIDCO and the IBank, SAFE-BIDCO contributed $750,000 to the State to participate in the California Small Business Loan Guarantee Program in 1990. In late May 2015, SAFE-BIDCO asked that these funds be returned to it. At the time SAFE-BIDCO requested the return of the funds, they were held in a segregated account by IBank. SAFE-BIDCO told IBank that the funds it contributed were intended to be invested and, along with future account interest, used as a loan loss reserve to cover SAFE-BIDCO’s losses on loan guarantees it made. According to IBank’s fiscal year 2012–13 annual report, the State received approval for $84.2 million in federal funding for use by the California Small Business Loan Guarantee Program, and began making guarantees with this funding in February 2011. In a July 2015 letter to IBank, SAFE-BIDCO’s chief executive officer (CEO) requested return of the funds, stating that the funds were no longer needed for their intended purpose.

  • In July 2015, IBank’s executive director responded to SAFE-BIDCO, stating that IBank does not have statutory authority to return the funds but would keep the funds separate until December 31, 2015, while SAFE-BIDCO explored other avenues to provide the necessary authority for IBank to make the transfer. In mid-December 2015, the executive director of IBank again informed SAFE-BIDCO that it did not have the statutory authority to return the funds and extended the period it would hold the funds separately until July 1, 2016. In late July 2016, IBank notified SAFE-BIDCO that it was exercising its right to combine the trust accounts of SAFE-BIDCO under the California Small Business Loan Guarantee Program account.

  • According to SAFE-BIDCO’s CEO, she attempted to obtain legislation to authorize the release of funds to SAFE-BIDCO, but the staff of the legislator she was working with indicated to her that they needed approval from the Department of Finance (Finance) to move forward with a bill. She stated that Finance staff indicated to her that this matter had nothing to do with them. Ultimately, the CEO was not able to obtain legislative resolution of the issue.

  • If money from the state treasury is issued to return the funds to SAFE-BIDCO, the Legislature would first need to pass legislation to allocate the funds. However, whether the Legislature should consider legislation to transfer these funds to SAFE-BIDCO depends on how the Legislature chooses to restructure SAFE-BIDCO. If the Legislature implements our recommendation to establish SAFE-BIDCO within the State Treasurer’s Office (Treasurer’s Office), a transfer of funds would be moot because SAFE-BIDCO would be part of the State. Additionally, if SAFE-BIDCO is dissolved, the issue would be moot. However, if the Legislature chooses to appropriate funding and require additional oversight of SAFE-BIDCO but does not make SAFE-BIDCO a part of the Treasurer’s Office, return of the $750,000 may be warranted.
State Law Limiting Programs
  • We identified an instance in which state law had limited SAFE-BIDCO’s ability to operate one program. SAFE-BIDCO provided to us a letter that it received in August 2012 stating that SAFE-BIDCO was not selected for participation in an intermediary lending pilot program run by the U.S. Small Business Administration (SBA). The letter from the SBA stated that SAFE-BIDCO was not eligible for the program because its board of directors is controlled by a government entity. State law requires the Governor and the Legislature to appoint the majority of SAFE-BIDCO’s board.

  • However, SAFE-BIDCO does not have sufficient resources to fully operate the programs it currently has, including one managed by the SBA. Therefore, being prevented from operating one program did not meaningfully limit SAFE-BIDCO’s ability to operate other programs to benefit small businesses.
SAFE-BIDCO’s Loan Committee
  • State law requires a loan committee of a financial development corporation, of which SAFE‑BIDCO is one, to emphasize consideration of applications that will increase employment of disadvantaged, disabled, or unemployed persons or increase employment of youth residing in areas of high youth unemployment and delinquency.

  • SAFE-BIDCO established a financing assistance policy, which is intended to govern loans made using funds it borrowed or its own funds and to guide its loan committee members in their decisions. However, the policy does not include a requirement to emphasize applications that would benefit certain groups. According to its loan officer, SAFE-BIDCO tries to assist every loan applicant, and it does not prioritize the groups emphasized in the statutory requirements.

  • SAFE-BIDCO does not include the financing assistance policy in the loan committee orientation packet given to new loan committee members, despite the fact that its bylaws require the loan committee to review applications and make decisions in accordance with the financing assistance policy. Instead, according to SAFE-BIDCO’s loan officer, he presents the loan application to the loan committee and answers any committee members’ questions or concerns before the committee votes to approve or disapprove the application. By not providing its financing assistance policy to loan committee members, SAFE-BIDCO cannot ensure that the members are aware of and follow the policy and that loan applications are reviewed, approved, or disapproved in a standardized, fair, and consistently applied manner.


  • To ensure consistency of its reviews and approvals of loan applications, SAFE-BIDCO should establish a process to provide all loan committee members with its financing assistance policy.

  • To make certain that loan committee members are aware of statutory requirements, SAFE-BIDCO should revise its financing assistance policy to ensure that it contains all required language, including emphasizing consideration of applications that will increase employment of disadvantaged, disabled, or unemployed persons or increase employment of youth residing in areas of high youth unemployment and delinquency.


Scope and Methodology

The Joint Legislative Audit Committee (Audit Committee) directed the California State Auditor to review SAFE‑BIDCO’s management and operations. Specifically, it directed us to review SAFE‑BIDCO’s financial condition and solvency, its efforts to obtain additional capital, how it operated its programs, and its oversight by state entities and SAFE‑BIDCO’s board. Table 5 lists the objectives that the Audit Committee approved and the methods used to address those objectives.

Table 5

Audit Objectives and the Methods Used to Address Them

  Audit Objective Method
1 Review and evaluate the laws, rules, and regulations significant to the audit objectives. Reviewed relevant laws, regulations, and other background materials applicable to SAFE-BIDCO.
2 Determine what state entities are responsible for overseeing SAFE‑BIDCO, those entities’ oversight responsibilities, and whether those entities have conducted that oversight appropriately.
  • Reviewed applicable state law to determine the entities responsible for state oversight.

  • Identified the Department of Business Oversight (Business Oversight) as the only state entity that provides oversight of SAFE-BIDCO.

  • Reviewed examination reports completed by
    Business Oversight.
3 Determine whether SAFE-BIDCO monitors its own progress toward achieving its mission and whether it reports on that progress. To the extent possible, identify and review the services and programs that SAFE‑BIDCO has provided since 1981 and determine the number of businesses served, jobs created, and the amount of capital provided by SAFE-BIDCO.
  • Reviewed the materials SAFE-BIDCO provides to its board of directors to report on goals and any other documents in which SAFE-BIDCO tracked its progress.
  • Determined that SAFE-BIDCO did not consistently track the number of businesses served, jobs created, or capital provided since 1981.

  • Documented every loan and loan guarantee made by SAFE-BIDCO for fiscal years 2011–12 through 2015–16 so that we could obtain a reasonable estimate of the businesses served and capital provided.

  • Compared the estimate SAFE-BIDCO used for the number of jobs created to the measure used by the U.S. Small Business Administration to determine reasonableness.
4 For the last five years, determine whether the programs and services SAFE-BIDCO offered were and are consistent with its authority under state law. Assess whether state law has limited the number of programs or services that SAFE-BIDCO has been able to provide. For each program SAFE-BIDCO currently offers, determine whether the program operates as intended and whether it is meeting any specified goals or objectives.
  • Documented the programs and services offered by SAFE-BIDCO over the last five fiscal years and tested 14 individual items (two for each of the seven programs that SAFE-BIDCO has operated in the last five fiscal years) to ensure that SAFE-BIDCO followed applicable laws and program rules.

  • Reviewed state law and interviewed SAFE-BIDCO staff to identify any possible limitations in the programs or services offered by SAFE-BIDCO.

  • Reviewed the materials SAFE-BIDCO provides to its board to report on program goals and other documents in which SAFE-BIDCO tracked the progress of its programs.
5 Evaluate the distribution of duties at SAFE-BIDCO between the staff it employs and any contracted firms it may use. Describe the basic responsibilities that staff members and contractors are assigned. Determine whether SAFE-BIDCO employees are considered to be state employees for the purposes of health and retirement benefits through the California Public Employees’ Retirement System (CalPERS).
  • Interviewed staff and reviewed contracts to determine the distribution of duties among SAFE‑BIDCO staff and contractors.

  • Reviewed contracted services to determine reasonableness.

  • Reviewed state law and SAFE-BIDCO’s correspondence with CalPERS to determine whether SAFE‑BIDCO staff are state employees for the purposes of health and retirement benefits for CalPERS.
6 To the extent possible, assess SAFE‑BIDCO’s current financial condition and solvency. At a minimum, consider the financial audits of SAFE-BIDCO over the past five years, the funding SAFE-BIDCO currently has access to, and the funding it uses to operate. Determine whether any improvements should be made to the scope of SAFE-BIDCO’s financial audits.
  • Reviewed audited financial statements and internal financial reports for fiscal years 2011–12 through 2015–16 to assess SAFE-BIDCO’s financial condition and solvency.

  • Identified SAFE‑BIDCO’s current assets and funding sources.

  • Did not identify any improvements that should be made to the scope of SAFE-BIDCO’s financial audits.
7 Determine how SAFE-BIDCO can request additional funding for capitalization and whether it has done so in the last five years.
  • Documented SAFE-BIDCO’s attempts to obtain additional funding for capitalization for fiscal years 2011–12 through 2015–16.

  • Estimated the amount of capital SAFE-BIDCO would need to address its declining net assets.

  • Reviewed SAFE-BIDCO’s use of its existing funding sources. Specifically, we reviewed its use of federal funding available to it and its efforts to sell its existing loan portfolio.
8 To the extent possible, review and evaluate SAFE-BIDCO's governance and financial oversight structure. At a minimum, determine the extent to which the following are true:  
a. The SAFE-BIDCO board of directors is informed about key financial and operational issues.
  • Reviewed board meeting minutes and the board packets for fiscal years 2011–12 through 2015–16.

  • Interviewed six of the nine current board members to obtain their perspective on issues facing SAFE-BIDCO. At the time of our interviews, one seat was vacant, one member had recently joined the board and so would not have knowledge of its workings, and one member was unavailable.
b. SAFE-BIDCO has effective and appropriate financial and governance controls. Reviewed SAFE-BIDCO’s internal controls and compared them to best practices identified in objective 8(c) and to the California Attorney General’s Guide to Charities, which provides best practices for nonprofits.
c. SAFE-BIDCO’s management practices are aligned with best practices for organizations of similar size and nature.
  • Identified organizations comparable to SAFE-BIDCO.

  • Given SAFE-BIDCO’s declining financial position, focused our review of best practices of comparable organizations to identify efforts of these organizations to seek funding.
9 Review and assess any other issues that are significant to the audit.
  • Reviewed claims made by SAFE-BIDCO that it is owed $750,000 that it had previously contributed to a state pool for participation in the California Small Business Loan Guarantee Program.

  • Reviewed extensive out-of-state travel made by the chief executive officer.

Sources: California State Auditor’s analysis of Joint Legislative Audit Committee audit request number 2016-133 and information and documentation identified in the table column titled Method.

Assessment of Data Reliability

In performing the audit, we obtained SAFE‑BIDCO’s general ledgers for fiscal years 2011–12 through 2015–16. The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of the computer‑processed information that we use to support our findings, conclusions, or recommendations. Specifically, we used the general ledger to determine the amount SAFE‑BIDCO paid to two contractors. To gain some assurance of the completeness of SAFE‑BIDCO’s general ledger data, we compared the account balances in SAFE‑BIDCO’s fiscal year 2015–16 general ledger to its fiscal year 2015–16 audited financial statements and found that the data were consistent with reported financial information. However, we did not conduct full accuracy or completeness testing on these data because this level of review was cost‑prohibitive. Thus, we determined that SAFE‑BIDCO’s general ledger data were of undetermined reliability for the purposes of this audit. Although this determination may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.

We conducted this audit under the authority vested in the California State Auditor by Section 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Respectfully submitted,  

State Auditor

Date: April 27, 2017


Tammy Lozano, CPA, CGFM, Audit Principal
Nathan Briley, JD, MPP
Brian D. Boone, CIA, CFE
Adrianna M. Hutchinson, MPP                        

Legal Counsel:

Mary K. Lundeen, Sr. Staff Counsel

For questions regarding the contents of this report, please contact
Margarita Fernández, Chief of Public Affairs, at 916.445.0255.  




1 Organizations described in section 501(c)(3) of the Internal Revenue Code are commonly referred to as charitable organizations and are eligible to receive tax-deductible contributions.
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