Overcoming an antibusiness bias
The idea of states cutting red tape for development permits and business licenses is nothing new, but Oregon has added some creative wrinkles to overcome a nagging antibusiness reputation.
Antigrowth sentiment was so strong in Oregon during the 1970s that then-governor Thomas McCall once quipped, "Come visit us, but for God's sake, don't stay!" That line was apparently delivered in jest, but Oregon, reeling from the construction industry slump, which has shut down most of its lumber mills, is still working overtime to convince business that the state wants diversified growth and jobs.
Companies interested in doing business in Oregon were concerned about the need to obtain environmental and other permits, so the state decided to copy neighboring Washington and institute a "one-stop" center, where information on all requirements for permits could be obtained. "Oregon became the second state in the country to apply the one-stop concept," says Paul Haugland, manager of Oregon's Office of State Regulation Assistance. Haugland headed Washington's pioneer program and was hired away by Oregon, where he has carried the idea much further.
Last year, legislation was passed that, in effect, gives businesses a regulatory guarantee. "We'll look at your project and tell you every permit and license you're going to need," explains Haugland. "If it turns out that we slipped up and forgot one, it's on us. You don't have to get it."
So far, the office hasn't missed a permit, so the legal question of what would happen if someone sued to block a project because of a forgiven license has never been resolved. But no one questions the merits of allowing a business to find out about all its permits at once.
Any company planning to set up shop in Oregon now fills out just one 4 1/2-page application. In 30 days, according to Haugland, his office will provide the guaranteed list of permits needed for the project. The office then acts as an advocate for the company in resolving any difficulties with state agencies.
Pension fund steps in
Late last year, Graydon Webb, president of G. D. Ritzy's Inc., wanted to expand his fledgling fast-food restaurant business, headquartered in Columbus, Ohio. Webb, a former vice-president for franchise sales at Wendy's International Inc., the highly successful hamburger chain, was eager to grow beyond his two outlets in the Columbus area, but doing it with a lot of debt would not be easy. Fortunately for Webb, he didn't have to. His company received a $2 million equity investment -- and from a very unlikely source: the Public Employees Retirement System of Ohio (PERS).
In exchange for 40% of its stock, G. D. Ritzy's became the $6.5 billion PERS's first small company investment since the Ohio legislature liberalized investment guidelines earlier in 1981. PERS, like most of the nation's public employee funds, had previously been governed by statutes limiting investments to larger, publicly traded companies. Thus, most of its investments were in highly rated debt of big companies, some of which were based outside the state.
Under the new guidelines, the Ohio fund is now authorized to put 5% of its assets -- or up to $325 million -- into any partnership, proprietorship, or corporation that is ether based in the state or has half of its assets or employees there. "Pension funds," says Robert McLaughlin, a PERS investment officer, "can step in to fill the financing gap to the benefit of the local economy and the performance of the fund." While it may take a while for PERS to find appropriate investments, in time it could put money into dozens of Ohio businesses and generate jobs there.
Other states seem to be following Ohio's lead in an effort to direct new capital into emerging companies. Neighboring Michigan, for example, badly scarred from the prolonged slump in the auto industry, recently adopted legislation permitting state pension funds to put up to 5% of its $6.7 billion State Employees' Fund in Michigan small companies and venture capital firms.
From ivory tower to marketplace
Pennsylvania was a pioneer in acknowledging the importance of technology transfer when it created the Pennsylvania Technical Assistance Program (PennTAP) in 1965. The program linked the state's small business community to existing academic resources. Now the state has begun to carry its role as business problem-solver one step further.
Later this year, a new statesupported program called the Ben Franklin Partnership will get under way with $1 million of state funds, to be matched by an equal amount of private money. Pennsylvania's idea is to further leverage university resources, which are already bringing technical assistance to small businesses, to assist entrepreneurs in product commercialization and applied research.
PennTAP, based at Pennsylvania State University, at University Park, has already earned its spurs with many smaller companies, in which lack of research facilities and personnel can make even a small technical problem loom very large. I. N. Rendall Harper Jr., president of American Micrographics Co. in Pittsburgh, for example, knew he was wasting lots of silver from the film plates he uses in his business but didn't know if it would be economical to recover it. PennTAP introduced him to Penn State researchers, who showed him how to reclaim the silver while complying with federal environmental rules.
Pennsylvania is not the only state with this type of incubator program. Georgia and Tennessee are among the others that have built small business programs around their universites. The result, says Reuben Harris, director of the Center for Industrial Services at the University of Tennessee, is that "businesses can get the help they need, and ivory tower professors get realworld experience."
Pennsylvania's Ben Franklin Partnership will operate from regional centers around the state. But instead of dealing only with technical problems, as PennTAP does, it will develop ways to move new ideas from the laboratory to the marketplace. The state hopes the new program will help create growth in advanced technologies such as robotics, biotechnology, and magnetics, as a means of offsetting declines in Pennsylvania's older industrial base.
A fresh approach to capital
No matter where an enterprise is based, finding equity capital for growth is often one of the toughest problems an entrepreneur faces. Private venture capitalists put money in few deals, and few states are willing to expose public funds to high risks. But even in the fiscally conservative Midwest, Indiana seems to have found a way to bring a new source of venture capital to the state's small companies.
Indiana's new Corporation for Innovation Development (CID), authorized last year by the legislature, will be capitalized by private investors, who get a credit -- 30% of their investment -- against their state taxes. While granting tax credits means that Indiana will give up some revenue initially, Lieutenant Gov. John Mutz points out that the approach allows the state to "leverage additional private investment while leaving venture capital investment decisions to the private sector." If the enterprises are successful, they will pay taxes.
Indiana expects CID to draw at least $8 million of private funds, primarily from the state's commercial banks, insurance companies, utilities, and manufacturers. The corporation, which will eventually pay investors Indiana state tax-exempt dividends, could make its first investments by the end of the year. And while it is too soon to say where the money will actually go, Marion C. Dietrich, CID's president and chief executive officer of Cummins Engine Co. in Columbus, Ind., says CID is particularly interested in funding enterprises that are devising productivity improvement technologies to assist manufacturing industries, such as auto and steel.
By law, CID must put its money into Indiana start-ups and new federally licensed small business investment companies. Dietrich reports that the corporation also plans to participate in leveraged buy-outs.
In creating CID, Indiana joins Connecticut and Massachusetts, among a few other states, in developing programs to make more venture capital available. Since its establishment in 1972, the Connecticut Product Development Corp. (CPDC) has committed about $5.3 million to finance product development by 39 companies within the state. When these businesses bring products to market, CPDC claims a royalty, which in 1981 amounted to $219,000. Since 1979, meanwhile, the Massachusetts Technology Development Corp. (MTDC) has invested about $3.7 million in 16 businesses, helping, it says, to make available an additional $14 million in capital for the companies from private sources.
"Private venture capitalists aren't geared to high-risk investments," says Fred Schmid, president of Crystal Systems Inc., a Salem, Mass., company that recently struck out in its efforts to attract private equity investors. Crystal Systems produces industrial synthetic sapphire crystals, but it needed new capital to develop a silicon product for commercial photovoltaic applications. Although private venture capitalists kept saying no, MTDC agreed to lend Crystal Systems $250,000 for seven years, in the belief that a market will eventually develop for the product.
What is more, MTDC's loan enabled Crystal Systems to get a larger credit line from its bank and another $500,000 in longterm debt from another lender. "MTDC's investment showed confidence in the business at a critical time," Schmid says.
The enterprising states
While the Reagan Administration's controversial proposal to create urban enterprise zones in depressed areas is still being considered by Congress, a few states are taking matters into their own hands. Regardless of what finally happens in Washington, Connecticut has passed enabling legislation for its own brand of enterprise zones. This fall it will decide which of the state's economically depressed communities will be the new enterprise zones.
Other states, including Virginia and Kentucky, have their own enabling legislation, and still more are looking at enterprise zones to stimulate business and employment. Connecticut's programs, for example, will offer companies state and local property tax relief, as well as $1,000 grants for each job created. What seems to distinguish Connecticut's plan from those being developed elsewhere is its focus on small businesses.
Such an orientation wasn't accidental. "We're interested in overall development of the zones," says John J. Carson, Connecticut's commissioner of economic development, "so we're targeting small and medium-sized businesses."
Many have criticized the federal enterprise zone plan because it would primarily benefit large corporations that can use tax write-offs. Instead of stimulating new business, this might merely lead to shifts of corporate assets from one side of town to another. Such concern has led small business advocates to suggest that any tax credits be made refundable, to ensure that they are useful to new and small businesses needing cash flow more than tax benefits.
While Connecticut didn't opt for refundable credits, it did establish a new $1 million loan fund for small companies operating within the zones. The fund will lend a company up to 25% of its fixed or working capital, up to a maximum of $100,000 for manufacturing concerns and $50,000 for retailers. It will lend the money for seven years at one percentage point higher than the rate of the state's most recent general obligation bond offering.
Connecticut's enterprise zone legislation will also assist small companies with a unique jobvoucher system designed to reduce the cost of finding qualified workers. The state labor department will determine which workers qualify for job credits either as zone residents or under the guidelines of the federal Comprehensive Employment Training Act (CETA). Those who do qualify turn vouchers over to the zone employer who hires them, says Carson, thus saving small companies the sometimes hefty cost of screening employees.
Going for growth in job training
Job-training programs may be coming of age with a new program in Arizona that targets funds for employment in such high-growth industries as electronics and aerospace. Arizona is taking an approach that is different from such states as North and South Carolina, Georgia, and Alabama, where job-training programs have been offered to a most any company willing to set up shop in the state -- even when the jobs are in such declining domestic industries as textiles and furniture making. To minimize unemployment problems down the road, Arizona's Office of Economic Planning and Development tries to help only those employers that are apt to generate growth.
The state conducted a major study titled "Opportunities in Arizona for Suppliers of High Technology Manufacturers," which amounted to a series of market studies for a number of industries. Now Arizona can offer jobtraining subsidies of up to 50% of wages for six months to industries in the state showing the greatest growth potential.
"We're trying to avoid training people for dead-end jobs," says Alton Washington, the state's manpower program manager. He reports that in the program's first year of operation, 8,000 people have been or are being trained by new programs.
Early indications point to satisfaction on the part of the employers. Comtec Economation Inc., for instance, a maker of electronic quartz crystals, is using the program to train 200 employees in Flagstaff. "It took the state only eight weeks to accept our application for training assistance," says Dave Convery, general manager.
A shift in tax incentives
While most state legislatures seek ways to stimulate business through an array of tax incentives, New York has a sharper focus. Eager to spur development of new -- particularly hightechnology -- companies, New York this year began exempting investors in new businesses from capital gains tax payments as long as their money is held in a company for at least six years.
The state has also granted its 6% investment tax credit and its new 10% research and development investment tax credit to new concerns. These measures are meant to provide willlng investors and greater cash flow in the early years of a business.
Whether the policy will have its intended impact won't be apparent for some time. The first investment tax credit refunds won't come until next year, and the capital gains exemption won't come into play for four years, when a portion of it becomes available. But an intense lobbying effort by the National Federation of Independent Business to have both measures apply to all small companies suggests that at least some people believe these measures could be significant spurs to investment.
In September 1981, California dropped the capital gains tax on long-term investments in all small independent businesses -- except those dealing in tangible assets, such as gems and collectibles. No concrete results are yet evident, but Michael Kieschnick director of California's Office of Economic Policy, says, "I've gotten hundreds of calls from lawyers and accountants." Kieschnick plans to conduct a survey this fall to see how the California exemption of capital gains for new small businesses has affected investment decisions.