HOUSE BILL REPORT

HB 2455

BYRepresentatives Locke, Silver, H. Sommers, Miller, Pruitt, Rector, Phillips, O'Brien and Ferguson

Authorizing local governments to establish public corporations to finance nonprofit corporations.

House Committe on Local Government

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

      Signed by Representatives Haugen, Chair; Cooper, Vice Chair; Ferguson, Ranking Republican Member; Horn, Kirby, Nealey, Nelson, Nutley, Phillips, Raiter, Rayburn and Zellinsky.

Minority Report:  Do not pass.  (1)

      Signed by Representative Wolfe.

House Staff:Steve Lundin (786-7127)

AS REPORTED BY COMMITTEE ON LOCAL GOVERNMENT JANUARY 30, 1990

BACKGROUND:

The laws of different states, including the state of Washington, permit nonprofit corporations to be formed for any lawful purpose.  Although it is frequent that a nonprofit corporation engages in charitable, educational, human services oriented, or cultural activities, no requirement limits their activities to such purposes.  A nonprofit corporation may engage in any legal activity, just as is the case for a for-profit corporation.

The primary distinctions between a not-for-profit corporation and a for-profit corporation are that nonprofit corporations: (1) do not have shares of stock; (2) do not make any disbursements of income to members, directors or officers, except, upon the dissolution of the corporation; and (3) cannot loan money or credit to their officers or directors.  A nonprofit corporations is authorized expressly to pay "reasonable" amounts of compensation to its members, directors, and officers for services rendered, and to confer benefits upon its members "in conformity with its purposes."

Our state supreme court has held that the authority of public entities in this state to issue "nonrecourse" revenue bonds for the benefit of private entities is such an arms length transaction that constitutional restrictions on the direct actions of government are not violated, including the prohibition against public entities "lending their credit" to private entities in general, or giving money or property to religious establishments.

Section 501(c)(3) of the Internal Revenue Code describes types of nonprofit corporations that are exempt from federal income taxes, including educational, charitable, and literary nonprofit corporations.

SUMMARY:

SUBSTITUTE BILL:  Counties, cities, and towns are authorized to create public corporations with the authority to: (1) construct or maintain facilities for nonprofit corporations that have a federal 501(c)(3) status; (2) sell or lease facilities for nonprofit corporations that have a 501(c)(3) status; (3) make secured loans to provide temporary or permanent financing or refinancing of project costs of facilities for nonprofit corporations that have a 501(c)(3) status; and (4) issue non-recourse revenue bonds, the interest payments on which may be either taxable or not taxable under federal income tax laws, to finance types of facilities for nonprofit corporations with a 501(c)(3) status that give rise to such a status. However, such facilities may not include: (1) higher education facilities; (2) low income housing facilities; (3) housing facilities financed by the housing finance commission; or (4) health care facilities.

These facilities must be located within the boundaries of the county, or town creating the public corporation.

Nonrecourse revenue bonds that are issued by a public corporation must be approved by both the county, city or town creating the public corporation and the county, city, or town within whose planning jurisdiction the facility that is financed by the bonds is located.

The nonrecourse revenue bonds are not an obligation of any public entity, and may be payable from only the revenues derived by the nonprofit corporation with a 501(c)(3) status, money and other property of the nonprofit corporation, and any additional security provided by the nonprofit corporation.  Nonrecourse revenue bonds may be issued with the interest payments that either are, or are not, subject to federal income taxes.  Any nonrecourse revenue bonds that are issued must be reported to the Department of Community Development.

Such bonds may be secured by a trust agreement between the public corporation and a corporate trustee.

Such a public corporation is subject to audit by the state auditor and may be altered or dissolved by the creating county, city or town.  Upon dissolution, the property owned by the public corporation vests in the creating county, city, or town.

Such a public corporation may not commingle any part of the proceeds of such bond sale, or of any revenues derived from any facilities of a nonprofit corporation with a 501(c)(3) status, with the funds of the county, city, or town creating the public corporation.

No director, officer, agent, or employee of a public corporation may have any direct or indirect financial interest in any property used in connection with any facility financed through the public corporation, nor may such persons have any financial interest in any contract for services or materials used in connection with such facilities.

No county, city, or town may give or lend any money or property in aid of a public corporation except as permitted under the constitution.

SUBSTITUTE BILL COMPARED TO ORIGINAL:  The type of nonprofit corporations that may receive such assistance is limited to nonprofit corporations with a federal 501(c)(3) tax status.  Nonrecourse revenue bonds may finance only those types of facilities that give rise to a 501(c)(3) status.  Nonrecourse revenue bonds that are issued must be reported to the Department of Community Development.

Fiscal Note:      Not Requested.

House Committee ‑ Testified For:    Representative Gary Locke, Prime Sponsor; Doreen Marchione, City of Redmond; Sharon Foster, YMCA's of Washington; Trina Westerlund, Childrens Institute for Learning Differences; Lynn Schrader, Seattle Children's Theatre; Paul Purcell, Catholic Charities; and Mike Doubleday, City of Seattle.

House Committee - Testified Against:      No one.

House Committee - Testimony For:    This will reduce the costs of art museums, theatre groups, and charitable groups to borrow funds.  There is no liability for governments under this proposal.

House Committee - Testimony Against:      None.