HOUSE BILL REPORT

ESHB 1553

As Amended by the Senate

BYHouse Committee on Trade & Economic Development (originally sponsored by Representatives Raiter, Cantwell, Doty, Wineberry, Schoon, Wolfe, Wood, Horn, Ferguson, Rector, G. Fisher, Silver, Ebersole, Phillips, Vekich, Cooper, Inslee, Brumsickle, Youngsman, Walk, Bowman, Basich, Tate, Betrozoff, Belcher, Braddock, Morris, Beck, Jacobsen, Walker, Pruitt, Rayburn, Kremen, May, R. King, Todd, Winsley, Rasmussen, Spanel, P. King and Sprenkle; by request of Governor Gardner)

Creating the Washington economic development finance authority.

House Committe on Trade & Economic Development

Majority Report:  The substitute bill be substituted therefor and the substitute bill do pass.  (12)

      Signed by Representatives Cantwell, Chair; Wineberry, Vice Chair; Doty, Ranking Republican Member, G. Fisher, Kremen, Moyer, Rasmussen, Rector, Schoon, Tate, Walk and Youngsman.

House Staff:Charlie Gavigan (786-7340)

AS PASSED HOUSE MARCH 8, 1989

BACKGROUND:

Businesses need money (capital) to start up or expand. This money can be obtained by borrowing it (debt) or by selling ownership interests in the business (equity).  Financial institutions normally provide the former;  venture capitalists and investors normally provide the latter.  Access to capital is important for the success and growth of businesses.

The state and local governments are precluded from providing direct support to businesses by lending of credit prohibitions in the state constitution.  These provisions do not allow the public to make gifts or loans to private persons or businesses, to invest in businesses, or to otherwise provide public backing of businesses.  An exception to this is providing aid to the poor "or" infirm.

The state does help private businesses by providing loans and grants using federal funds. Examples include the Community Development Block Grant program, the Development Loan Fund, and the Coastal Community Revolving Fund.  As long as the money used for these programs is federal money, state lending of credit prohibitions do not apply.

One means of obtaining capital is through the use of bonds. Bonds are basically loan contracts issued by governments or private corporations.  The bondholder purchases the bond from the issuer.  In return,  the bondholder receives interest and the bond is redeemed (the issuer repays the money) at a specified maturity date.  Most bonds are negotiable (easily transferable), and normally run from ten to thirty years from the date of issuance to the date of maturity.

Private bonds can be backed by assets of the business issuing the bonds (i.e.,  real estate or equipment) or can be unsecured. Government bonds can be backed by the taxing power of the government (recourse) or can be backed only by income from the project or purpose the bonds are used for (nonrecourse). Government bonds can be taxable or nontaxable.

Public corporations can issue bonds provided legislative authority is given. If the bonds are used to provide financing for facilities not owned by the public, lending of credit prohibitions may apply.

The state supreme court held, until 1985, that nonrecourse bonds issued for facilities not owned by the public was lending of public credit (although the court generally allowed this bond financing based on the "poor or infirm"  exception, or based on low risk and public policy).  In 1985, the court held that publicly issued nonrecourse bonds were not lending of public credit because no debt or liability was incurred by the public.  Examples of allowable issuance of public nonrecourse bonds to provide financing for facilities not owned by the public are: (1) the Washington Health Care Facilities Authority; (2) the Housing Finance Commission; and (3) the Washington Higher Education Facilities Authority.

SUMMARY:

The Washington Economic Development Finance Authority (WEDFA) is established as a public body to help small and medium-sized businesses meet their capital needs. The WEDFA is administered by a fifteen member board, one member each from the Department of Trade and Economic Development, the Department of Community Development, the state treasurer, four legislators, and eight members from the general public appointed by the governor. Three of the public members must be from Eastern Washington.  The Department of Trade and Economic Development will provide the staff for the WEDFA, although the staff cannot issue nonrecourse bonds or make credit decisions.

The WEDFA is authorized: (1) to develop programs to fund export transactions for small businesses that cannot get commercial loans from private lenders at competitive rates and terms; (2) to provide advance or up front financing for economic development to farmers based on their subsidy from the federal government for not growing crops; (3) to pool loans guaranteed by the federal Small Business Administration or the Farm Home Administration; and (4) to access federal development finance programs.  The WEDFA is also authorized to engage in broad activity to assist businesses as long as the activity is within specified policy guidelines.

The WEDFA is required to develop a plan outlining economic development goals and defining strategies to accomplish the goals. The authority is required to hold at least one public hearing regarding its plan, and update the plan at least every two years.  The authority is also required to implement operating procedures for itself and its programs.

The WEDFA may not lend state credit, issue bills of credit, take deposits, or finance housing, health care facilities, or educational facilities that are financed through other statutory commissions or authorities. The WEDFA is authorized to issue nonrecourse bonds. These bonds are not obligations of the state.

The authority may not exceed 250 million dollars in outstanding debt at any time. The authority is to report annually to the legislature.  The authority may not take any new applications after July 1, 1992, and the Legislative Budget Committee is to conduct a fiscal and program review of the authority by December 1, 1992.

The statutory list of executive state officers includes members of the WEDFA. Financial and commercial information provided to the WEDFA by businesses are exempt from public disclosure.

EFFECT OF SENATE AMENDMENTS:  The senate amendments:  (1) add savings and loans to the definition of "eligible banking organizations"; (2) authorize the Washington Economic Development Finance Authority (WEDFA) to provide advice and technical assistance to Industrial Development Corporations; 93) authorize the WEDFA to contract with Industrial Development Corporations to provide management and technical assistance to businesses receiving financing from the Industrial Development Corporation.  In order to receive such a contract, the Industrial Development Corporation must agree to provide at least half its financing (loans and investments) to businesses operating in distressed areas; (4) remove language prohibiting the WEDFA from taking applications after July 1, 1992; and (5) provide that information that is made available as part of the certification of a Business and Industrial Development Corporation is not subject to public inspection.

Fiscal Note:      Requested February 13, 1989.

House Committee ‑ Testified For:    John Anderson, Director, Department of Trade & Economic Development; David Doughterty, Director, Business Assistance Center, Department of Trade & Economic Development; Jay Reich, Attorney, Preston, Thorgrimson, Ellis and Holman; Jim Davis, Wheat Farmer, Douglas County, Washington;  Mike Fitzgerald, Director, Economic Development Board; Rod Bristol, Kent Hull and Hiroshi Takaki, Small Business Improvement Council; David H. Hayden, SeaFirst Bank, International Division; Keith Hopper, Washington Bankers Association; Bob Campbell, Shearson Lehman Hutton; Paul Sommers, Northwest Policy Center, University of Washington; Glen Phipp, Yakima Economic Development Council;  Tom Newton, Lewis County Economic Development Council; and Bob Sebastian, Export Assistance Center, Seattle, Washington.

House Committee - Testified Against:      None Presented.

House Committee - Testimony For:    Access to capital is very important for the survival and growth of businesses. Washington state has one of the lowest business start-up rates and one of the highest business failure rates in the nation.  Other states are much more involved in helping businesses meet capital needs. The Washington Economic Development Finance Authority will help Washington businesses without violating the state constitutional prohibitions against lending public credit.  By making capital more readily available to this state's small and medium-sized businesses, the authority will help provide more jobs and investment, and will enable Washington's businesses to better compete in the global economy.  There are enormous amounts of funds available in the international capital markets; the authority is capable of tapping these markets. The authority is flexible enough to rapidly respond to changes in financial markets.

House Committee - Testimony Against:      None Presented.

VOTE ON FINAL PASSAGE:

      Yeas 89; Nays 5; Excused 4

Voting Nay: Representatives Heavey, Holland, Padden, Patrick and Wolfe.

Excused:    Representatives Day, Dellwo, Hankins and Wang.