House Bill 530 is heard in the House Finance Committee for a fuller discussion than it had last week. It will be considered with a recommendation to either concur or not. House Bill 580 is a similar, but different, bill.
Rep. Pryor Gibson, D-Anson, expains the bill and says the biotech industry is a bright spot in the economic recovery. The bill would enable a private fund to make loans for life sciences. Taxpayers assume the risk.
Rep. Hugh Hoilliman, D-Davidson, says this is a new and different incentive program, and they need to try this out. He supports the bill.
Rep. Skip Stam, R-Wake, has a letter from staff that says language on page 2 and page 4 contradicts itself where the taxing authority is transferred to a private entity and the credit is refundable (i.e., cash from the taxpayers). There is nothing unique about the companies considered for the incentives, giving the government the power to pick winners and losers. There’s a $30 million estimate of how much could be lost and paid by taxpayers. This is very low; the total potential for loss is mindboggling.
Gibson says this is new territory for the General Assembly. Some changes have been made: the company no longer issues the tax credits, and the bill changes the order that the credits are issued. In a shell game, the Life Science Development new entity provides notice to the Dept. of Revenue and then the Dept. of Revenue issues the tax credits.
Rep. Larry Hall, D-Durham, has questions, and Norris Tolson, president of the Biotech Center, is called up to address questions. Where will the start-up funds come from? They’ve asked the Golden LEAF to provide start-up funds, and then it will be self-sustaining.
Gibson says if it passes this year, we’ll most likely see tune-ups and probably more in later years to get it right. How are ethics handled? Some conflicts of interest in economic interests of board members, loans, and the companies that get the loans are addressed in the bill, similar to the boards that administer JDIG and JMAC grants.
Rep. Bill Faison, D-Orange, has clarifying questions, and Ed Gaskins, a lawyer, is called in to respond. Gaskins says there are two certificates. One says the entity has met the requirements of the bill, and the second is for a tax credit to the investor. An entity ? not the state ? will decide whether to issue the tax credit and for how much? and will use to avoid franchise or other business checks.
Golden LEAF will provide initial money. (It’s not clear what Golden LEAF gets in return.) We don’t know who’s next – institutional investors. And it will fund itself once it’s underway. Bank of America invests and gets a membership certificate. Money is invested and hopefully makes a bunch of money. If so, BofA gets its money back. If not and the fund loses money, BofA will be made whole through tax credits. Gibson says by collectively grouping these investors and guaranteeing the risk with taxpayers’ money. “We can do these kinds of projects.”
Rep. Thom Tillis, R-Mecklenburg, asks about white space between venture capital and investors ? there’s a gap. Norris Tolson says there are biotech companies that need money for third-stage manufacturing sites that can’t get money. The fund will provide it. Tolson says they’ll continue to use their lending model, which he says has a very conservative default rate. (Find more information about the biotech center here.)
Rep. John Blust, R-Guilford, wants to know why there’s a last-minute rush. Gibson says it’s not being rushed, and it’s having debate now. Blust says there’s not enough time, and LSD looks like a credit default with the taxpayer assuming all rhe risk. He sees all kinds of red flags.
Stam says the investors won’t loan the money on their own. Golden LEAF will give them the start-up money, but the Speaker has said you can’t take money from the Golden LEAF. There’s a self-perpetuating board that starts with handing out $100 million. “This is the second worst bill we’ve considered this year.”
Rep. Deborah Ross, D-Wake, aks if there aren’t any defaulted loans, the taxpayer will have to pay nothing, right? No other security whatsoever is required. Gaskins says loans are for land, bricks and mortar, and equipment. Would the assets be used to pay off the loan? Gaskins says the entity would take a first lien on everything. But the bill doesn’t specify the line of default liens. Staff says it’s not explicitly stated.
Rep. Darrel McCormick, R-Wilkes, asks questions that Hancock, attorney for the Biotach Center, is called on to address and says they are authorized to put together this nonprofit entity which will look for private money. It will be loaned out by “the best investors in the world.” Lien on the land, building and equipment. What if 30 percent of it went bad? Less than $20 million loss, in the meantime the state would have the use of all this private money to create jobs. The Biotech Center has been working on this for four years.
Rep. Van Braxton, D-Nash, asks about the 30- and 60-day process to call in the loans. How will the legislature be kept in the loop? Hancock says the biotech entity will vet the loans so they’ll only have good ones. If a loan begins to have a problem, they’ll rework them right away to fix it. They’ll have competent people to oversee the whole thing.
Rep. Johnathan Rhyne, R-Lincoln, says just because something is good and may provide some benefits for someone does not mean that government should do it. Why is it a proper function of governemnt to provide venture capital funds? Gibson says sometimes government needs to pick up the slack, and we’re in a new age, and we have to make up for this “lack of capital” environment. Rhyne says if this is a proper function of state government, then tell me what is NOT someplace government should get involved. Gibson says this is new ground, and we need to do it.
Rep. Bill McGee, R-Forsyth, says if one defaults, the other loans could be successful. But if the entity fails, it shouldn’t fall to the taxpayer. Where do the profits go? The nonprofit would have to be dissolved, and then the remaining money would go to the General Fund. McGee says this is too complicated and convoluted, and the state shouldn’t be doing this.
Rep. Dale Folwell, R-Forsyth, asks Gaskins about who can get the credits. A qualified investor gets a tax credit certificate. The “qualified investor” definition is different than what is normally thought of ? not limited but is directed at large investors. Folwell says there is a lot of money to be made in investing in these capital projects and suggests the Biotech Center look to successful investors in the private market and pursue them without taxpayer and legislative involvement.
Norris Tolson alludes that the N.C. Biotech Center is responsible for all the biotech jobs and investments in North Carolina.
Rep. Curtis Blackwood, R-Union, raises constituional questions of pledging tax authority and has problems with the bill.
The motion to recommend that the committee concur with House Bill 530 is made and by a vote involving raising of hands passes 17-10. The bill is eleigable to be heard on the floor. I’m not sure if they will hear H.B. 530 or the slightly different version Sen. David Hoyle, D-Gaston, pushed through in the Senate, H.B. 580. Either way, it looks like LSD will be in the House.
