CAPCOs bite dust – Owens says program ‘simply failed,’ signs bills ending funding

Colorado’s certified capital company program got $100 million to invest in the state’s emerging businesses, but it "simply failed," said Gov. Bill Owens.

On Thursday, he signed bills that ensure the CAPCOs don’t get another $100 million to try again, effectively putting an end to the program.

By David Milstead, Rocky Mountain News

http://www.insidedenver.com/drmn/business/article/0,1299,DRMN_4_2705792,00.html

The new law concludes a mad legislative dash to roll back $100 million in tax credits the state was scheduled to allocate to the program next month. Two of the top plans were merged. The money was split between a new state venture-capital authority and the CoverColorado program, which provides health insurance benefits to chronically ill Coloradans.

They were, said Owens, "two bills that equal one unified plan to solve the problem."

The CAPCO industry has defended its value to the end. Spokesman Eric Anderson points to more than $20 million in investments since 2002 and said the program "brought jobs and investment to Colorado and has the potential to bring more of both."

The program was created in 2001 to give $200 million in tax incentives to insurance companies for providing money to certified capital companies, or CAPCOs, which would then invest in Colorado businesses. The program, pitched in part as a way to provide venture capital to rural Colorado, had bipartisan support. But it also had bipartisan opposition, and passed narrowly. Owens let the bill become law without his signature.

The first companies were certified in 2002, and the first $100 million in tax credits was committed. The staff of Colorado’s Office of Economic Development began its oversight of the program.

The more OED staff members studied the law, the less they liked it. Their issues:

• CAPCOs are required to invest 30 percent of the certified capital after three years and 50 percent after five years – but are never required to invest 100 percent of the money.

• The law allows CAPCOs to take more than 5 percent of the $100 million each year for management fees, operating expenses, plus other "reasonable" expenses.

• The state does not get the principal of the investments back, and the profit-sharing part of the law was not enforceable, OED staff felt.

• Insurance companies’ money was guaranteed with bonds, so the $100 million in tax credits turned into about $40 million to $50 million of investable money at the beginning of the program.

The industry said the OED staff simply didn’t understand the program, misinterpreted the language of the law, or assumed worst-case scenarios that simply wouldn’t come true.

But Bob Lee, head of the Office of Economic Development, decided not to wait and see how it turned out. His staff talked to regulators in other states and "we became convinced the model was flawed, the program wouldn’t work, that jobs would not be created and the taxpayers would not be getting a good return on their investment," Lee recalled in an interview Thursday.

Attempts were made in the spring of 2003 to eliminate the second $100 million round of tax credits, but no consensus emerged, and the bills failed.

In July 2003, the program’s opponents’ views were featured in a Rocky Mountain News article in which Lee said "The program is structurally flawed, and it needs to be fundamentally changed, or it needs to be abolished." That article was the first of two dozen on the program and the legislative push to kill it.

One report detailed the investments of Wilshire Colorado Partners and its parent company, Newtek Business Services. Newtek/Wilshire had made $4 million in investments by July 2003, representing more than 95 percent of the "rural" money invested at that point.

But Newtek/Wilshire unabashedly invested the money in companies controlled and majority- owned by Newtek, with a goal of developing its own business-service companies. And the two "rural" investments so far employ just a handful of people out of an office park 600 yards west of the Jefferson County line in Clear Creek County.

While Newtek Chief Executive Barry Sloane said this generated economic activity, exactly the intent of the program, Lee said it was a perfect example of the problem, since the investments were "legal, but they violate the legislative intent."

By late August, Owens made his views known: Fix the program or kill it. He used his annual State of the State address in January to say abolishing CAPCOs was one of the top priorities in the legislature this session. "We can’t mend this program. We must end this program."

Two bills quickly emerged as the favorites.

A bill to create a Colorado Venture Capital Authority, sponsored by Sen. Ron Teck, R-Grand Junction, and Rep. Joe Stengel, R-Littleton, was drafted with the input of Lee and his staff. It would sell the tax credits each year and select venture-capital companies by competitive bid. Importantly, the state would get back all of the investment principal and a portion of the profits.

Another bill, sponsored by Rep. Shawn Mitchell, R-Broomfield, and Sen. Mark Hillman, R-Burlington, would give the money to Cover Colorado, which provides health insurance benefits to chronically ill Coloradans. The plan would reduce the annual assessment CoverColorado places on health insurers to cover its deficit.

Each bill passed in its originating chamber of the legislature, but behind-the-scenes machinations prompted a compromise. Each plan would get $50 million of the tax credits. The compromise was struck Feb. 18.

It was forged, Owens said, from "a spirit of negotiation and cooperation."

George Lipper of the National Association of Seed and Venture Funds, a group that believes CAPCOs are inefficient and supports other programs instead, said he believes Colorado is the first state to roll back an existing CAPCO commitment.

"We applaud the conscientious efforts of the Colorado Office of Economic Development and the Rocky Mountain News for their alert and responsive efforts in behalf of the state’s taxpayers," Lipper said.

The industry, meanwhile, says it’s incorrect to say that the program has been "killed," as a Thursday News article said. "There’s still 10 years and $100 million worth of program we’re in the midst of," Anderson said.

What’s next

• The legislature will establish a new Colorado Venture Capital Authority to prompt the investment of $50 million over the next 10 years.

• Insurance companies will get $50 million of tax credits if they contribute to CoverColorado, which provides health insurance benefits to chronically ill Coloradans.

• The legislature will continue to try to change the existing CAPCO program once the Legislative Audit Committee gets CAPCO contracts it subpoenaed Feb. 25. CAPCOs have argued that changes to the CAPCO law are impossible because it would impair their contracts.

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