Tax-free financing looks attractive again
Higher borrowing costs and Washington’s thriving economy have renewed interest in government-issued industrial revenue bonds. State and Spokane County officials say businesses once discouraged by the paperwork and costs involved are reconsidering as the spread between rates on conventional loans and tax-free financing approaches 2 percent.
At Mackay Manufacturing Inc., for example, operators two weeks ago began making electronic and medical instrument components on a machining cell financed with $1.3 million in bonds issued by the Industrial Development Corp. of Spokane County.
The corporation, or IDC, was active in the years following its creation in 1982. But as interest rates fell during the 1990s, businesses turned again to conventional borrowing.
Now, after 15 consecutive rate hikes by the Federal Reserve Board, tax-free financing looks attractive again.
Mackay Manufacturing owner Mike Mackay can attest to the program’s benefits. He took advantage of the bonds six years ago to finance a $2 million expansion of his plant on East Montgomery. He estimates the bonds, which carry an interest rate of 6 percent, will save him about $100,000 over their 10-year term. Although up-front legal costs were high, the IDC was able to recycle much of the 2000 paperwork for the new bonds, cutting those costs by about half.
Mackay says he expects the new bonds, which will be purchased by Farmers & Merchants Bank, will carry a rate of less than 5 percent. The IDC will lend the bond proceeds to Mackay, then sign the loan over to F&M. The bank advanced Mackay the funds to get the machining cell in place as soon as possible.
Mackay, who says business is the best it’s been in 20 years, expects the new bonds to save the company about $70,000.
Itron Inc., Wilcox Farms and Alutek Inc. are among the companies that have benefited from IDC bonds in the past. The securities, it should be stressed, do not in any way obligate taxpayers if the business fails. The bank is on the hook.
The bonds can be used only to finance capital improvements, not operating expenses.
The state issues bonds through the Washington Economic Development Finance Authority. WEDFA, unlike local issuers, can sell taxable and tax-free bonds. It can also make a single bond issue to support development by one business in several counties.
Director Jonathan Hayes says he already has the paperwork in hand for eight bond issues this year, more than the seven for all of 2005 and twice the four done in 2004.
Hayes says a $10 million cap on loans within six years to a single borrower has been a major impediment. The authority has been forced to turn away applicants seeking $12 million to $15 million, he says, but Congress is close to approving a bill that will double the cap to $20 million by the end of the year.
He expects a huge increase in activity when the limit is raised.
Millwood Mayor Daniel Mork has chaired the IDC board of directors since the mid-1990s. He says most bonds issued in recent years have refinanced taxable loans.
“We’d like to be busier,” Mork says. IDC bond counsel Roy Koegen, he notes, met with Spokane Area Economic Development Council President Tom Fritz last week to explore ways more businesses can be made aware of the bonds and the benefits of using them.
Also, the county commissioners are considering an overhaul of the corporate bylaws, although that effort snagged last week over open-meeting concerns. The resolution would also expand the board to include representatives from Spokane Valley and Liberty Lake. Authorized membership stands at nine, but only four seats are filled. Two positions allotted the City of Spokane are vacant, as are one seat for the county, and the seats set aside for Deer Park, Spangle, and Airway Heights. The resolution amending the IDC bylaws will add Commissioner Mark Richard and Liberty Lake Mayor Steve Peterson.
A revitalized IDC would certainly be a boon. Economic development groups are always looking for ways they can help small-business owners. Mackay says the bond-financed equipment will enable him to lower costs, a constant demand of his customers.
“I think they’re terrific,” he says. “They’ve been a great tool.”