HOUSE BILL REPORT

E2SSB 5398

BYSenate Committee on Ways & Means (originally sponsored by Senators Halsan, Fleming, Sellar, Warnke, Lee, Cantu, Tanner, Smitherman, Anderson and Wojahn)

Changing provisions relating to industrial development corporations.

House Committe on Trade & Economic Development

Majority Report:  Do pass.  (15)

      Signed by Representatives Vekich, Chair; Wineberry, Vice Chair; Amondson, Braddock, Cantwell, Doty, Grant, Holm, Kremen, McLean, McMullen, Moyer, Rasmussen, B. Williams and J. Williams.

House Staff:Stephen Hodes (786-7092)

AS REPORTED BY COMMITTEE ON TRADE & ECONOMIC DEVELOPMENT

APRIL 1, 1987

BACKGROUND:

The Industrial Development Corporation Act of 1963 was intended to stimulate the Washington economy via equity investments and loans through the creation of industrial development corporations.  Only two such corporations have been formed, neither of which are currently operating in the state.  The need for an effective program to increase investment in Washington businesses is underscored by the low rate of new business incorporation in the state relative to other states.

One of the most important factors for the development of new enterprises is the availability of capital resources of the right type for the enterprise at the right time. There appears to be a gap in the state's capital markets for intermediate-term debt, loans and equity investments which involve more risk and greater patience regarding profitability than the debt financing provided by commercial banks, but which involve less risk and patience than the initial equity investments provided by venture capital companies or partnerships.

Intermediate-term debt is lent for periods of three to ten years, allowing time for a firm's markets to expand and for its sales and earnings to grow. Unlike loans for fixed assets, such as buildings or equipment, such loans are not backed by collateral to protect a lender in case of default.  Requirements for fully secured lending place heavy burdens on small businesses which often do not have substantial assets or capital reserves.  Intermediate term debt which is unsecured or subordinated involves lenders taking a higher risk than is required in short-term lending by commercial banks.  In exchange, lenders receive higher returns in the form of higher interest rates charged on such loans.

The need for mid- risk financing is met in different ways in states around the country.  Some states have sponsored the creation of large privately financed intermediary institutions.  Other states, most notably California and Michigan, have authorized the creation of a new class of financial institutions, business investment development corporations, known as BIDCOs, to fill this opening in financial markets.  BIDCOs have access to Small Business Administration loan guarantee programs, which provide them with the ability to leverage additional private funds.  The success of these intermediaries in California and Michigan has led to substantial interest in them in states round the country in recent years.  Proposed amendments to Washington's industrial development corporation law would result in authorizing the creations of institutions resembling BIDCOs.

SUMMARY:

The Industrial Development Corporation Act of 1963 is amended.  The requirement that financial institutions be members and have voting control is eliminated.  Industrial development corporation investments are to be in firms with a majority of their workforce in Washington state and with fewer than 250 employees.  Fewer people are required to form an industrial development corporation and they are given greater flexibility in operations.

The amount of earned surplus required is changed from one-half of the capital stock to one-quarter, which serves as a reserve to cover losses.  The main loan limitations placed on financial institutions in the 1963 Act remain unchanged.  The limitations protect the depositors and stockholders of those companies from excessive risk taking.  The reporting requirements on industrial development corporations are increased.

The amount of capital necessary to start an industrial development corporation is increased to $1 million in equity and $1 million in lendable funds.  The Department of Trade and Economic Development provides technical assistance to industrial development corporations in formation.  Industrial development corporations may contract with the Department to deliver management assistance to firms but one-half of the firms must enter first-source agreements to interview first from a list of unemployed individuals.

Industrial development corporations must meet certification requirements prior to approval of corporate documents. They are required to make quarterly reports but the Supervisor of Banking is not to consider riskiness in regulating the activities of industrial development corporations unless it constitutes gross mismanagement. Tax credits are available to investors in industrial development corporations starting at twenty-five percent in fiscal year 1988 and declining by five percent per year to a zero percent tax credit in 1993.

Fiscal Note:      Attached.

House Committee ‑ Testified For:    Senator Halsan; Wayne Schwandt, Fourth Corner Development Group; Julia Phillips, Seattle Chamber of Commerce; and John Thompson, Cowlitz County Economic Development Council.

House Committee - Testified Against:      None Presented.

House Committee - Testimony For:    Industrial development corporations (IDCs) would not do financing on their own but would network with other investors. One IDC still active. No constitutional problems with bill.  More availability of financing of this type available would stimulate economy.  Greatest need is for business expansion financing that banks will not do.

House Committee - Testimony Against:      None Presented.