Will Clinton save IDB financing?

Businesses lost one of the lowest-cost sources of financing last year when the federal Industrial Development Bond program expired. But bankers and some members of Congress hope to reinstate the program

Dan Bronfman couldn't have said it better himself.

Bronfman is a Union Bank vice president who has been writing letters and magazine articles about low-interest, tax-exempt Industrial Development Bonds and touting their virtues to anyone who would listen.

Finally, in early February, a U.S. Congressman from Pennsylvania introduced a bill to revive the recently expired program, calling it "one of the last federal economic growth tools available to state and local governments working to promote growth and job opportunities."

The IDB program has a host of supporters and a track record of financing expansion projects, but it lapsed June 30 because of congressional inaction and then died for the time being in October when President Bush vetoed it as part of an urban aid package he opposed.

Bronfman and other supporters are hoping the Clinton administration will revive the program as part of its economic plan -- and Bronfman is hoping for some changes that will render the program even more useful for California companies.

Curious journey

Among the bonds' chief supporters is Rep. William Coyne, the Pennsylvania Democrat who was joined by a majority of the House Ways and Means Committee in introducing a bill that would extend the IDB program permanently.

In introducing the legislation, Coyne pressed for President Clinton to include

an IDB extension in his economic growth package. Coyne called IDBs "a proven creator of economic growth and jobs."

Coyne's proposal is the latest leg in a sometimes curious journey for IDBs, which provide low-cost financing for small and mid-sized manufacturing companies to buy land, buildings and equipment. (During 1991, for example, the interest on variable rate IDBs averaged 6.8 percent.)

According to Bronfman, however, most business owners and managers were not aware of the availability of IDB funds.

"Because of this lack of awareness, over the last two years, a total of approximately $140 million of IDB issuing capacity went unused in California. That was millions of dollars that could have helped dozens of companies across the state expand their manufacturing facilities and increase employment," Bronfman said.

Awareness means financing

But in cases where businesses are aware of the bonds and take advantage of them, the results can be dramatic. Industrial Dynamics Inc., a container inspection firm based in Torrance, credits the bonds with keeping the company in California.

According to a Los Angeles Times article, the company was thinking seriously of expanding into Nevada, Arizona or Mexico before the availability of IDB financing persuaded it to stay.

Steve Calhoun, an Industrial Dynamics executive vice president quoted in the Times article, said that with the IDB financing the company instead expanded to a 91,000-square-foot plant next to its existing facility. (Calhoun added, however, that the company is still unhappy about regulations and business taxes in California.)

Bronfman says one reason that so much IDB money went begging is that so many business people mistakenly believe that IDBs were repealed along with other tax breaks in the Tax Reform Act of 1986.

Before the 1986 act, he explained, IDBs were widely used for a variety of purposes. The 1986 act limited their use to companies involved only in manufacturing, and when that happened many people thought IDB financing was no longer available.

Benefits and limitations

Nothing could be further from the truth. Organizations like Union Bank's IDB department exist solely to arrange IDB financing and will walk a company through every step required to obtain the funds.

The funds are intended to help businesses purchase major assets. Borrowers can build a new facility, buy a newly built plant, acquire and rehabilitate an existing plant, expand their current site, buy new equipment or combine almost any of these uses. In some cases, real estate developers can even use IDBs to construct build-to-suit projects.

Despite these benefits, IDBs are saddled with some shortcomings in the minds of even their staunchest California supporters. Says Bronfman, "Although IDB financing is intended to aid manufacturers, there are several aspects of the codes that regulate IDBs that make them less functional for companies locating or expanding in California."

Among these shortcomings, according to Bronfman:

* IDBs have been made available through short-term legislation that is worrisome to business owners who have long lead times in planning plant expansions. "Businesses do not want to depend upon a financing source that might not be available when funds are needed," Bronfman points out. "Without the assurance that low-cost IDB financing is available, manufacturers might postpone or cancel expansion projects, or plan to relocate out of California to take advantage of other savings in land and building costs, wage rates, health insurance premiums or the cost of utility services."

* The $10 million capital expenditure limitation is too low. Given the high cost of opening a manufacturing facility in a metropolitan area, the current $10 million limitation makes the use of IDBs very difficult for technologically intensive or rapidly growing companies. Increasing the limit to $25 million would remove the current limits to employment growth and investment that are imposed by the $10 million ceiling.

* Borrowers should be allowed to use up to 30 percent of the funds for engineering and research and development. Under current law, at least 75 percent of the space in an IDB-financed facility must be used for core manufacturing. Because areas in a facility dedicated to product engineering and research cannot be financed by IDBs, it is almost impossible for companies involved in aerospace, high-technology and biotechnology to issue IDBs. By allowing these types of manufacturers to finance space used for engineering and research, California could retain its leadership in these important industries.

* Borrowers should be permitted to use up to 50 percent of the bond proceeds to finance land purchases. The current 25 percent limitation on expenditures for land is a hindrance to IDB financing in California because of the high cost of land in or near cities. This works against the state by making expansion projects outside California more attractive.

Bronfman said these and other recommended changes would enable more manufacturers in California to take advantage of IDBs, which can be the deciding factor in whether a company remains in the state or relocates.

Clinton and Congress

The San Diego firm of Invitrogen, for example, a biotechnology company planning a 55,000-square-foot manufacturing plant, has said it may move to Oregon if the IDB program is not revived.

According to Invitrogen officials, the company won't be able to afford to remain in California without the IDB financing. Without IDBs, they say, they are likely to move out of state to trim expenses.

Whether IDBs will be available again soon enough to save companies like Invitrogen will depend on the Clinton economic package and the fate of the bill introduced by Coyne. Clinton was scheduled to deliver a broad outline his economic plan in late February, but specifics of the package are not expected to be announced until March. Until the fate of IDBs is settled by Congress, business as usual will have to wait for politics -- as usual.

IDB financing's impact on the economy

The following is a sampling of some of the Southern California projects that have been financed by Industrial Development Bonds, including the approximate number of jobs created by each project.

PACIFIC HANDY CUTTER in Costa Mesa, Orange County, obtained $2 million in financing and created 49 new jobs. The company manufactures tools using industrial blades, which are used for opening cartons and as art knives. Bond proceeds were for a new, 6,435-square-foot manufacturing plant next to the company's current facility.

OUTDOOR RECREATION GROUP in the Eastside Enterprise Zone, Los Angeles County, obtained $2.8 million in financing and created 134 new jobs. The company manufactures its own line of recreational products, including backpacks, duffel bags and other camping accessories. The bond proceeds were used to purchase an existing 92,000-square-foot building on 4.5 acres of land.

LORBER INDUSTRIES in Carson, Los Angeles County, obtained $3 million in financing and created 60 new jobs. The company dyes and prints knit and woven fabrics, which are then sold to garment manufacturers. Bond proceeds were used for the purchase of machinery and equipment necessary for the firm to develop its own in-house graphic design process.

CAITAC USA/JAE CO. in Los Angeles obtained $5 million in financing and created 150 new jobs. The companies manufacture and process denim jean material, which involves the knitting, dying and stone washing of the fabric. Bond proceeds were for purchase of a parcel of land with an existing building.

Z-NIX CO. in Pomona, Los Angeles County, obtained $1.2 million in financing and created 30 new jobs. The company manufactures computer products, including keyboards. Bond proceeds were for construction of a 28,600-square-foot manufacturing facility and to purchase equipment.

GOLDEN WEST HOMES in Perris, Riverside County, obtained $5.3 million in financing and created 130 new jobs. The company manufactures single-family homes through an assembly-line process and obtained the bond proceeds to purchase land and two existing buildings, enabling it to consolidate and expand its operations.

TRIPLE H FOOD PROCESSORS in Riverside obtained $2.5 million in financing and created 55 new jobs. The company manufactures a wide variety of food products, but primarily produces sauces and juices. It obtained the financing for construction of a 59,000-square-foot manufacturing facility and machinery, allowing it to expand its operations.

So what's an IDB?

A quick primer on IDB financing

Industrial Development Bonds are a type of municipal financing available to private companies for the purchase of land, buildings and new equipment for a manufacturing operation. Because interest paid to the IDB bondholder is exempt from state and federal taxes, the interest rate paid by the borrower is substantially below rates traditionally available to medium-sized companies. Although the local municipality's name is associates with the IDB to make it tax-exempt, all responsibility for payment rests with the private company as borrower. Since bondholders can look only to the company and not the municipality for repayment, the IDB must be supported by a letter of credit issued by a financial institution to guarantee the company's obligation.