HOUSE BILL REPORT

 

 

                                    HB 1358

 

 

BYRepresentatives Day, Kremen, Vekich, Schoon, Rayburn, P. King, B. Williams, Silver, Wineberry and Doty

 

 

Authorizing the establishment of business and industrial corporations.

 

 

House Committe on Trade & Economic Development

 

Majority Report:  The substitute bill be substituted therefor and the substitute bill do pass. (14)

      Signed by Representatives Vekich, Chair; Wineberry, Vice Chair; Amondson, Beck, Cantwell, Doty, Fox, Grant, Hargrove, Holm, Kremen, Moyer, Rasmussen and B. Williams.

 

Minority Report:  Do not pass. (1)

      Signed by Representative Heavey

 

      House Staff:Stephen Hodes (786-7092)

 

 

           AS REPORTED BY COMMITTEE ON TRADE & ECONOMIC DEVELOPMENT

                               JANUARY 22, 1988

 

BACKGROUND:

 

Business and industrial development corporations (BIDCO's) are financial institutions which provide intermediate-term debt to finance business expansion.  Intermediate-term debt is lent to firms for periods of three years or more, and is used to finance new product development or market expansion. Intermediate-term debt is often subordinated or unsecured and involves the assumption of higher risks by lenders than short-term lending or fixed asset financing which is widely available from existing financial institutions. Intermediate-term financing involves higher returns in the form of higher interest rates charged on such loans.  Such financing involves a knowledge of firms, management, and markets which is more specialized than conventional financial institutions require.

 

BIDCO's are private institutions, authorized and regulated by state governments.  They are intended to provide a flexible financing tool to supplement existing financial institutions.  They can offer a wide range of financing assistance to businesses, including debt financing and equity investments.  They are also capable of providing access to the federal Small Business Administration's loan guarantee programs.

 

In the states in which they have been authorized, BIDCO's are capitalized with private equity investments, and they also have the capacity to borrow funds in capital markets to finance their operations.  BIDCO's supplement existing capital markets and are designed to be able to participate in a wide variety of financial transactions with existing institutions.  Existing financial institutions are among the primary investors in BIDCO's in the states in which they presently exist.

 

BIDCO's have been authorized in recent years in other states, most notably in California and Michigan.  Other states, including Massachusetts and Maine, have established state-chartered, privately capitalized institutions to respond to the need for intermediate-term debt by local businesses. Financial incentives for investments in BIDCO's vary from state to state. Investors receive tax incentives for investments in BIDCO's in some states, while other states utilize public funds to make direct investments in such corporations.

 

SUMMARY:

 

SUBSTITUTE BILL:  The creation of business and industrial development corporations (BIDCO's) is authorized.  The purposes of BIDCO's are defined as providing financing and management assistance to Washington businesses.  The amount of equity capital required for starting a BIDCO is defined as $1,500,000.

 

A process for certifying BIDCO's is elaborated.  BIDCO's must be certified by the state Supervisor of Banking.  The supervisor is to consult with the directors of the Departments of Trade and Economic Development and Community Development.  Certification requirements include minimum equity capital of $1,500,000 and $1,500,000 in lendable funds and the submission of an initial business plan with three years of financial projections.  A $3,000 certification fee is required.

 

The Department of Trade and Economic Development and the Department of Community Development are authorized to provide technical assistance to persons forming BIDCO's.  The Supervisor of Banking is given broad powers to regulate BIDCO's for financial soundness.  The Supervisor is directed to examine BIDCO's at least once every eighteen months and to make quarterly reports as to their condition.  An annual report on the program is required of the Supervisor.

 

BIDCO's are provided with substantial flexibility as to their financing powers.  Financing powers include royalty financing, loans, equity investments, debt with equity features and utilization of Small Business Administration programs. BIDCO powers are limited regarding real estate dealings.

 

Tax credits are provided for investments in BIDCO's against the business and occupation tax, the insurance premium tax, and public utility tax.  Credits go into effect in fiscal 1989 at 25 percent, and decline by 5 percent a year until 1991, and phasing out after fiscal 1991.  Larger credits against these taxes are offered for investments in BIDCO's which have more than fifty percent of their investments in economically distressed areas.  Credits begin in fiscal 1989 at 35 percent, declining by 5 percent a year until 1991, and phasing out after fiscal 1991.

 

Investors utilizing the credits withdrawing investments within the first three years are obligated to return a portion of the credit taken proportional to the withdrawn funds.  Credits are limited to $2.5 million in the 1989-91 biennium, $1 million in 1991-93.

 

BIDCO's are prohibited from providing financing assistance to individuals or businesses with close relationships to those controlling a BIDCO.

 

An appropriation of $45,000 is provided to the Supervisor of Banking in the Department of General Administration and an appropriation of $55,000 is provided to the Department of Trade and Economic Development for the biennium ending June 30, 1989.

 

SUBSTITUTE BILL COMPARED TO ORIGINAL:  The role of the Supervisor of Banking in evaluating individual loans made by BIDCO's is clarified.  Investors in BIDCO's are restricted to utilizing only one of the set of six tax credits authorized in the original bill.  The cap on total credits available under the legislation is clarified.  The rule-making powers of the Department of Revenue in regard to the tax credits available under the bill are made more explicit.  Tax credits not taken in one year may not be carried over into succeeding years.

 

Appropriation:    $45,000 to the Supervisor of Banking in the Department of General Administration; $55,000 to the Department of Trade and Economic Development.

 

Fiscal Note:      Requested January 25, 1988.

 

House Committee ‑ Testified For:    Pat Dunn, Washington Jobs Coalition; Bruce Bartlett, member of Governor's Small Business Improvement Council; Bill Lotto, Economic Development Executives of Washington; Wayne Schwandt, Fourth Corner Development Group; David Dougherty, Department of Trade and Economic Development.

 

House Committee - Testified Against:      None Presented.

 

House Committee - Testimony For:    A tested way to increase the funds available in the state for the expansion of businesses.  Has been used in other states.  Firms in the state need more long-term and mid-range financing.

 

House Committee - Testimony Against:      None Presented.